Animal Spirits Podcast Summary

Episode: Talk Your Book: Elevator Growth in Mid Caps
Host: The Compound
Guests: Matt Bartolini, Managing Director at State Street Global Advisors and Head of Spider America's Research Team
Release Date: April 14, 2025

1. Introduction to Mid Caps

The episode delves into the often-overlooked segment of the stock market: mid-cap companies. Hosted by Michael Batnik and Ben Carlson, alongside guest Matt Bartolini, the discussion emphasizes the strategic importance of mid caps in portfolio diversification and investment growth.

2. The Overlooked Opportunity of Mid Caps

Michael Batnik recounts his early career experience, highlighting how mid caps were undervalued and underallocated by many investors. He notes, “My boss thought he had the markets figured out by investing in midcaps because he thought no one else did” (01:15).

Ben Carlson elaborates on this by explaining that mid caps are often neglected by Wall Street analysts, which leads to less research and coverage. This oversight creates opportunities for investors looking to capitalize on undervalued segments. He states, “They're overlooked by Wall street analysts, folks that go on TV to talk about the latest stock” (03:06).

3. Mid Caps vs. Large and Small Caps

The conversation differentiates mid caps from large and small caps, emphasizing their unique position in the market. Matt Bartolini explains that as the market grows, mid caps evolve into large companies, noting, “Mid caps are now large companies... it used to be 10 billion was a cap or something. That's inflation” (01:44).

Ben Carlson adds that mid caps balance the operational efficiency of large caps with the growth potential of small caps, making them a versatile investment choice.

4. ETF Insights: S&P Mid Cap 400 (MDY)

A significant portion of the discussion focuses on the Spider S&P Mid Cap 400 ETF (Ticker MDY). Matt Bartolini questions the weighting methodology of the S&P Mid Cap 400, observing discrepancies in top holdings (04:33). Ben Carlson clarifies that while the index is cap-weighted, it avoids extreme concentration seen in large cap ETFs by preventing mega outliers from dominating the portfolio (05:39).

5. Diversification and Sector Exposure

Mid caps offer broader sector exposure compared to the S&P 500, which is heavily weighted toward technology. Ben Carlson points out that mid caps hold about 10% in tech, significantly lower than the S&P 500's 35%, thereby reducing sector concentration risks (07:31). This diversification extends to sectors like industrials, consumer staples, and financials, making mid caps a balanced investment option.

6. Market Trends and Impact of Tariffs

Recorded on March 31st, the episode addresses contemporary market issues such as tariffs and their impact on mid caps versus large caps. Michael Batnik raises the hypothesis that mid caps might be better positioned against tariffs due to their more domestic revenue streams (11:05). However, Ben Carlson counters by noting that small caps have struggled despite their domestic focus, suggesting profitability remains a critical factor (11:08).

7. Investor Flows and ETF Trends

The episode highlights significant capital inflows into mid-cap ETFs, particularly in response to recent market volatility and the downturn of mega-cap tech stocks. Ben Carlson notes, “...2 billion have come into mid cap ETFs this month” (16:03), indicating a strategic shift by investors seeking diversification amidst the decline of the MAG 7 tech giants.

8. Reconstitution and Index Maintenance

Ben Carlson explains the reconstitution process of the S&P Mid Cap 400, which involves annual reviews and quarterly rebalances to ensure the index remains representative of the mid-cap segment (20:11). This systematic approach helps maintain the integrity and performance consistency of mid-cap ETFs like MDY.

9. Fixed Income Flows and Emerging Trends

The discussion touches on the behavior of fixed income investors, noting a shift towards longer-duration bonds and active fixed income ETFs. Ben Carlson highlights, “Active fixed income ETFs are on pace to have 200 billion of inflows in 2025” (25:00), reflecting a trend towards managing rate volatility and seeking higher income amidst uncertain economic conditions.

10. The Role of Gold and Commodities

Gold ETFs have also seen notable inflows, with Ben Carlson stating, “Gold ETFs have taken in $6 billion in March. That's their fifth most on record” (26:02). This inflow is attributed to investors seeking hedges against inflation and market instability.

11. Private Markets vs. Public Market Volatility

In addressing the interplay between public market volatility and private market investments, Ben Carlson advises maintaining diversification over trying to time market movements. He suggests that broad diversification is more effective than concentrating bets against prevailing investment flows (29:50).

12. Conclusion and Final Insights

Wrapping up the discussion, the hosts encourage listeners to explore mid-cap ETFs further by visiting State Street Global Advisors' website. Ben Carlson emphasizes the enduring benefits of mid-cap investments for portfolio diversification and growth potential.

Notable Quotes

• Michael Batnik (01:15): “My boss thought he had the markets figured out by investing in midcaps because he thought no one else did.”
• Ben Carlson (03:06): “They're overlooked by Wall street analysts, folks that go on TV to talk about the latest stock.”
• Ben Carlson (07:31): “...mid caps can offer you that they can help solve for this concentration bias.”
• Ben Carlson (11:08): “Small caps have not done well... they're probably not as profitable as everybody else.”
• Ben Carlson (16:03): “...2 billion have come into mid cap ETFs this month.”
• Ben Carlson (25:00): “Active fixed income ETFs are on pace to have 200 billion of inflows in 2025.”
• Ben Carlson (26:02): “Gold ETFs have taken in $6 billion in March. That's their fifth most on record.”

Key Takeaways

• Mid Caps as a Strategic Investment: Mid caps bridge the gap between large and small caps, offering a balance of growth potential and operational stability.

• Diversification Benefits: Investing in mid-cap ETFs like the S&P Mid Cap 400 can reduce sector concentration risks inherent in large-cap heavy indices like the S&P 500.

• Investor Sentiment Shifts: Recent market volatility and the underperformance of mega-cap tech stocks have driven significant inflows into mid-cap ETFs as investors seek alternative growth avenues.

• Sector Exposure and Reconstitution: The mid-cap index maintains diversity through systematic reconstitution and sector balance, ensuring it remains an attractive option for diversified portfolios.

• Emerging Trends in Fixed Income and Commodities: Alongside mid caps, investors are shifting towards active fixed income ETFs and commodities like gold to hedge against inflation and market instability.

For more information on the S&P Mid Cap 400 ETF (MDY) and other investment opportunities, visit ssga.com.

This summary is intended for informational purposes and does not constitute investment advice. Please consult a financial advisor before making investment decisions.