We did the math over a 30-year period, and it's not even close
The midcap index is much more diversified - along with other advantages.
Which is a better U.S. stock index for your retirement plan: the well-known S&P 500 index of large U.S. companies or the more obscure S&P MidCap 400 index of middle-size companies?
Most people would say the S&P 500. It's the benchmark index for the U.S., and indeed for global markets. If you own just one stock fund, people will say, own the S&P 500 or an equivalent.
But how smart is that?
Let's start with a simple question: Which has been a better investment over the past, say, 30 years?
People outside Wall Street will probably say they don't know, while those who work in finance, suspecting a trap, may hedge their bets.
The answer: It's not even close. Even though the S&P 500 SPX has been through three or four massive booms since 1996 - and is in one right now - the midcap index MID has beaten it by a wide margin.
If you had invested $10,000 in the State Street SPDR S&P Midcap 400 exchange-traded fund MDY 30 years ago this month, in July 1996, and held the money there, reinvesting the dividends, today you'd have $226,000 - an average compound return of almost exactly 11% a year. (For illustration purposes, we're ignoring taxes - for example, if you held the money inside a 401(k) or an IRA.)
If you had invested that money instead in the State Street SPDR S&P 500 ETF Trust SPY over the same period, today you'd have $188,000, or 17% less. The average compound return: 10.3%. Over time, these differences add up.
This outperformance, incidentally, is a bit awkward for all those theorists claiming that the so-called "size factor" - meaning the outperformance of smaller companies' stocks - is dead. Companies in the S&P 400 range in value from those like as Boston Beer $(SAMO/U)$, brewer of Sam Adams, which has a market value of about $1.7 billion, up to companies such as Twilio $(TWLO)$, a cloud-communications company that is currently valued at $33 billion.
Now for a second question: Over that same 30-year period, which of those two ETFs was riskier?
The answer: It depends. Actually, nobody on Wall Street has a good definition of risk, which is why they hide behind Greek letters and jargon: Sharp ratios, Sortino ratios, Treynor ratios and so on. Wall Street uses as its proxy for risk the idea of the volatility of returns - if one asset rises and then falls, it is "riskier" than one that doesn't. Others argue, with some force, that the true definition of "risk" is one that everyone on Main Street would instinctively understand: Forget the volatility - what are the chances I will lose my money?
Measured in volatility, the S&P 500 over that period has been less "risky," just as Wall Street orthodoxy would suggest. Shares of bigger companies are supposed to be less risky. The large-cap index is better on various ratios, including the Sortino ratio. (A friend of mine - a very widely followed guru in international markets - says, privately, "Nobody understands the Sortino index.")
But on other measures, you could plausibly argue that the midcap index was less risky. Which of the two suffered the biggest "drawdown," meaning loss of wealth, during that 30-year period? It was the S&P 500, although to be honest, there wasn't much of a difference. At one point investors in the 500 experienced a 51% (temporary) loss of wealth, while for the 400 it was 49%.
On other, more meaningful measures, the differences were stark. During that time, the worst 1-, 3-, 5-, 7-, 10- and 15-year periods experienced by investors in the large-cap S&P 500 were worse than the comparable worst such periods for the S&P 400. For example, during its the worst 10-year period, the S&P 500 lost an average of 3.5% a year. In the S&P 400's worst 10-year period, the investor made a positive 3.6% a year in average returns.
Over 1, 3, 5, 7, 10 and 15 years, the S&P 400 had better average returns than the large-cap S&P 500.
It had a shorter "lost decade," too. Adjusted for inflation, the large-cap S&P 500 index did not regain its September 2000 peak until almost 13 years later, in May 2013. For the midcap S&P 400, that period was less than nine years (and that was measured to the brief bottom of the 2008-09 crash, although it still counts).
There is a world of difference between looking at a bear market on a chart and living through it. Younger investors today have little idea how utterly disillusioned investors had become with the stock market by 2002-03 (the bottom of the first bear market) and 2009 (the bottom of the second).
Meanwhile, there are two other measures that make the S&P 400 a more appealing investment than the S&P 500.
First, the midcap index is far less concentrated and far less dependent on a few big names. Using standard measures such as the percentage of assets in the top 10 stocks, or a statistical calculation called the Herfindahl-Hirschman Index, the S&P 400 is actually a much more diversified index. The S&P 500 has become dominated by a few highflying technology names, such as Nvidia (NVDA), Apple $(AAPL)$ and Microsoft $(MSFT)$.
The top five holdings in an S&P 500 index fund account for 29% of the fund by value, if you can believe it. The top five in the S&P 400? Just 4.1%.
And, second, it is cheaper. While few assets have escaped the current euphoria, the S&P 400 has risen considerably less in the last few years than the S&P 500. As a result, it sells for 16 times forecast per-share earnings, compared with a large-cap index on a price-to-earnings ratio above 20.
Finally, most people automatically buy the S&P 500 and think of it first when they think of a diversified U.S. stock index. This must, logically, make it a seller's market for the stocks in the index: Lots of institutions, mutual funds and individual investors will buy them almost automatically. The same is hardly true for the S&P 400. All other things being equal, that should also make the S&P 400 a better long-term bet, because it should make it cheaper.
None of this proves anything about the future, naturally, and you can take it all with a grain of salt. Many financial advisers, wisely, will point out that you don't have to choose and can invest in both.
-Brett Arends
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 14, 2026 14:12 ET (18:12 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments