Prediction: This Vanguard ETF Will Outperform the S&P 500 Over the Next 12 Months

Being the middle child is tough. Such is life for mid-cap stocks. The territory defined as having market values of $2 billion to $10 billion is overlooked relative to its larger and smaller peers.

Asset allocators and index builders have been labeling stocks by market capitalization, and mid-caps' overlooked status has been amplified in recent years as mega-cap growth stocks, including the "Magnificent Seven," have taken center stage in domestic markets.

Those storied technology and tech-adjacent stocks are largely responsible for the ascent of the S&P 500, so maybe it's an audacious statement. But mid-caps are ready to outperform the S&P 500 over the next year, and I think the Vanguard Mid-Cap Growth ETF (NYSEMKT: VOT) is the exchange-traded fund (ETF) to bet on.

Hedging my bet with VOT

It's not that mid-caps have been bad in recent years. Investors' lack of enthusiasm for the segment boils down to wanting, and getting, more from large-caps. For the three years ending Oct. 22, the S&P MidCap 400 Index returned 48%, barely better than half the returns of its large-cap counterpart.

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Much of mid-caps' laggard status can be blamed on the group being largely comprised of cyclical fare while lacking exposure to tech stocks. Just look at VOT's stablemate, the Vanguard Mid-Cap ETF (NYSEMKT: VO). That ETF has a 12.60% weight to tech. VOT goes well above that at 19.60%. So part of my VOT bet is also a wager that tech will retain leadership in 2026, and that some of that ebullience will spread to mid-caps. Tech exposure has already paid dividends for VOT because the ETF returned 72.6% over the past three years, trouncing VO and the S&P MidCap 400 along the way.

In addition to tech exposure, the VOT play is rooted in the ETF's plumbing. Yes, the strict definition of "mid-cap" is a market value of $2 billion to $10 billion, and yes, VOT purports to be a mid-cap ETF. VOT and VO are really plays on medium-sized companies. That liberalization of mid-cap is how a stock like Robinhood Markets, with its $117.2 billion market cap, is VOT's biggest holding.

The median market cap of VOT's 121 holdings is $45.7 billion -- well beyond mid-cap territory. What gives? VOT's selection universe is the 70th and 85th percentile of the domestic equity market as scored by market value. So as market values have increased among large-caps -- looking at you, "Magnificent Seven" -- medium-sized companies are bigger, and so are many VOT holdings.

Mid-caps have other pleasant surprises

Mid-caps being overlooked is surprising, because so many investors turn to smaller stocks for diversification purposes and to access higher rates of growth. What they really do is embrace small-cap equities when they should be looking at mid-caps.

The reason is because mid-caps outpaced both large and small counterparts for the 25 years ending June 30, 2025, accomplishing that feat while being less volatile than small-caps. I'll bet on VOT beating the S&P 500 over the next year, and I'd bet the farm on it outrunning most small-cap ETFs.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds - Vanguard Mid-Cap ETF and Vanguard Index Funds - Vanguard Mid-Cap Growth ETF. The Motley Fool has a disclosure policy.