The S&P 400 Mid-Cap SPDR represents a portfolio of 400 firms that range in size from a bit larger than $11 billion down to about $200 million for the smallest companies on the list. Note that $11 billion is not particularly small. A company of this size would rank around 219 on the S&P 500, which is designed to represent larger capitalization stocks. Therefore, there is considerable overlap between the mid-cap 400 and the S&P 500. Because of this large overlap, there is little reason to expect substantially different returns from these two indices in the current environment. 

The industry make-up of the S&P 400 is remarkably similar to that of the S&P 500. Financial firms account for 20.5% of the mid-cap index and 20.6% of the S&P 500. In fact, of the major sectors, only consumer discretionary -- which represents 16.6% of the mid-cap 400 and 11.2% of the S&P 500 -- varies by more than a 5% weighting.

That said, the S&P 500 does also have a 4% greater weighting (16.6% versus 12.6%) in technology issues. This suggests greater volatility is possible. Although MDY significantly outperformed the broader indices during the bear market, it is unlikely to do so going forward. Prior to 2000, many of the firms in this arena were undervalued. This is no longer the case. Mid-cap equities are now as overpriced as the rest of the market. This means if the stock market turns lower, you will not be able to hide in MDY as you could have in 2000 to 2002.

In theory, mid-cap stocks should provide diversification as compared with their larger brethren. During 2002 and the early part of 2003, our data had shown correlations of only about 55% between the mid-cap 400 and the S&P 500. However, recent history has pushed those correlations up above 85%. There is no real fundamental reason to believe these correlations will change substantially (because valuation levels are now similar) in the near future. Therefore, if equities turn lower now, then I would expect similar returns from mid-cap stocks as compared with large-cap stocks.