Conventional wisdom says that the best funds to hold for the long-term are S&P 500 index funds, but a strong case can be made for mid-cap funds as the best long-term holdings.
Mid-cap funds buy stocks of companies that are in the prime of their growth cycle: They’re large enough to minimize the market competition and risks of small companies, but they’re still small enough to grow faster than many of the mega-caps that comprise the majority of the large, cap-weighted index funds.
For a quick performance reference, look no further than the 8.4% 10-year annualized return, through June 1, for the S&P MidCap 400 Index, which compares to 7.3% for the S&P 500.
Although past performance is no guarantee of future results, the fundamentals for mid-cap stocks should boost returns over the S&P 500 in the next ten years and beyond.
So, with that backdrop, here are three of the best mid-cap funds to buy and hold over the next decade.
Best Mid-Cap Funds to Hold for the Next Decade: Vanguard Mid-Cap Index Fund Investor Shares (VIMSX)
Expenses: 0.20%, or $20 for every $10,000 invested
Minimum Initial Investment: $3,000
One of the best funds to cover the mid-cap stock market at a low cost is Vanguard Mid-Cap Index Fund Investor Shares (VIMSX).
The passive nature of index funds is a great way of capturing the performance of a market segment because the low expenses are less of a drag on returns to investors than actively managed funds.
Index funds also remove manager risk, which is the risk that the manager will make timing or selection mistakes, which cause an actively managed fund to lose to an index.
VIMSX proves this point with its 7.6% 10-year annualized return, which beats 70% of all mid-cap blend funds. Although the next decade may not bring the same performance, it will likely favor passively managed funds like VIMSX.
Best Mid-Cap Funds to Hold for the Next Decade: T. Rowe Price Diversified Mid Cap Growth Fund (PRDMX)
Minimum Initial Investment: $2,500
If you’re looking for long-term growth with a mid-cap stock fund, one of the best funds you can buy is the T. Rowe Price Diversified Mid Cap Growth Fund (PRDMX).
Mid-cap stocks already have a historical long-term performance edge over large-cap stocks and the growth objective of PRDMX can juice returns even more. Mid-cap growth stocks like Aon (AON), AutoZone, Inc. (AZO), and Crown Castle International Corp (CCI) have helped power PRDMX ahead of category peers.
The 10-year annualized return for the fund is 8.3%, which is better than nearly 80% of mid-cap growth funds.
In addition, the last decade’s performance is completely under the 12-year tenure of PRDMX manager, Donald J. Peters. Therefore, the future may be just as bright for this mid-cap fund.
Best Mid-Cap Funds to Hold for the Next Decade: Buffalo Discovery Fund (BUFTX)
Minimum Initial Investment: $2,500
Sometimes the best funds are the smaller, lesser-known ones. When it comes to the mid-cap fund department, the Buffalo Discovery Fund (BUFTX) fits that category.
The managers of the BUFTX portfolio look to buy stocks that can benefit from innovation and long-term secular trends. They’re also not afraid to buy beaten-down, unloved stocks that have temporarily fallen out of favor.
This go-anywhere style extends to market cap, as the fund holds some large-cap stocks like Alphabet Inc (GOOG, GOOGL) and Apple Inc. (AAPL), but also small-caps like CommVault Systems, Inc. (CVLT), in addition to its mid-cap stock holdings, which comprise most of the portfolio.
The diverse holdings and strategy translates into strong long-term performance, as evidenced by the 9.13% 10-year annualized return, which beats 97% of mid-cap growth funds.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.