Overview:
Started in 1991, the S&P MidCap 400 Index tracks a diverse basket of medium-sized U.S. firms. A mid-cap stock is broadly defined as a company with a market capitalization ranging from about $2 billion to $10 billion. Although the S&P 400 is not as popular as some of the larger indices (such as the S&P 500), it is an important benchmark for many fund managers who invest in this segment. This index contains solid firms with good track records that are simply not large enough to be included in the much larger S&P 500 index.

Composition:
As the name suggests, this index consists of 400 equities. The stocks are chosen based on market capitalization, liquidity and industry representation. The index contains firms that are situated in size between the S&P 500 Index and the S&P SmallCap 600 Index. It is a market-weighted index, meaning that larger firms have more influence on the index's performance than smaller ones. The average size of a firm in this index is between $1-4 billion. When taken together, the 400 components of the S&P MidCap 400 Index represent about 7% of the total market value of U.S. equities. The top 10 holdings are quite balanced and represent about 8% of the fund. This makes the index much less concentrated than its large-cap index peers, where top holdings can often represent 30-40% of an entire index's value.

The table below lists the current top ten holdings in the S&P MidCap 400 Index, as well as the top ten sectors represented in the index (data as of July 2004):

Positives:
The S&P MidCap 400 Index has historically outperformed its larger sibling, the widely quoted S&P 500. This is due to the fact that smaller firms generally outperform their larger rivals over time. Why is this the case? Well, companies often find it harder and harder to boost revenues and earnings at a fast clip as they grow and mature. Because of this, larger firms tend to grow at a slower pace than their smaller rivals.

Drawbacks:
Although it has grown in popularity in recent years, the S&P 400 remains largely overshadowed by the S&P 500. Meanwhile, investors who wish to invest in smaller firms usually choose the Russell 2000 or the S&P 600. The S&P MidCap 400 Index is stuck in the middle of the market and is primarily used by fund managers. Because of this lack of visibility, the index is not as liquid as its large-cap peers.

How can I trade/invest in this index?
A variety of different mutual funds and ETFs track the S&P MidCap 400 Index. Our favorite way to trade this index is through an investment in the S&P MidCap 400 SPDR (symbol MDY). This ETF closely tracks the index's returns, is relatively liquid, and charges an extremely low 0.25% expense ratio. Thanks to its status as an ETF, investors can buy or sell the S&P MidCap 400 SPDR anytime during normal trading hours, just like a common stock.

Additional Information:
S&P MidCap 400 Index information from Standard & Poor's  
S&P MidCap 400 SPDR (MDY)  
iShares S&P MidCap 400 Index Fund (IJH)