I’ve always been a fan of mid-cap stocks, particularly because Wall Street tends to focus on large-cap stocks. And while small-cap stocks can be rocket ships, they can also flame out. By the time a small company graduates to a mid cap, it’s a good bet that management is seasoned and its market share is significant.

In the mid-cap arena, one of the best mutual funds is the Vanguard Selected Value Fund (MF: VASVX). Jim Barrow and Mark Giambrone still manage the bulk of this value fund’s portfolio, and do a fine job of it.

This Vanguard fund got through the bear market in better shape than its mid-cap value index competitors, though it has underperformed on the upside. Chalk that up to Barrow’s long-standing distaste for REITs of all stripes.

The managers tend to put together a fairly concentrated portfolio of their best ideas and stick with them, trading around the edges until an even better idea comes along. Low price/earnings ratios and decent yields tend to catch their eye, along with strong balance sheets and the potential for some catalyst to drive a company’s shares ahead of the market over time.

The fund is up almost 4% year to date, putting it in the middle of the pack for its category. The top three holdings as of Dec. 31 were Yamana Gold (NYSE: AUY), Goodrich Corp. (NYSE: GR) and Murphy Oil Corp. (NYSE: MUR), and are down modestly on the year. However, the next three similarly weighted stakes, Stanley Black & Decker (NYSE: SWK), Capital One Financial (NYSE: COF) and Coventry Health Care (NYSE: CVH), have gained a minimum of 12.8% in 2011.

On an absolute basis, Selected Value had a terrific 2010 — up 19.4% — though it did lag the index benchmark. Still, when you can find good managers like Barrow and Giambrone, there’s little reason to switch. Obviously, the $25,000 minimum for the fund makes investing small amounts here difficult.

In that case, you can use the Vanguard Mid-Cap Value ETF (NYSE: VOE). This exchange-traded fund (ETF), or rather its MSCI MidCap 450 Value Index bogey, has tended to outperform the S&P MidCap 400 Value Index — in large measure because of a healthy weighting toward REITs.

Indeed, this is pretty much the only reason the index has recently been outpacing my preferred mid-cap value fund, Vanguard Selected Value. But outperformance can come at a cost, and this mutual fund ETF tends to be a good bit more volatile than the active fund.

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