After stumbling earlier this year, equities are recovering with mid-cap exchange traded funds coming out on top.
Mid-cap stocks and ETFs are outperforming other asset class categories year-to-date. The S&P MidCap 400 Index has gained 2.4% so far this year, but the S&P LargeCap 500 Index is up 0.7% and the S&P SmallCap 600 Index is up 0.3%. The broader Russell 2000 Index, though, has gained 2.2% so far this year, but still slightly lower than mid-caps.
“Mid-cap stocks tend to be more volatile as they typically lack economic moats–or sustainable competitive advantages,” according to Morningstar analyst Michael Rawson. “As such, they will exhibit greater sensitivity to macroeconomic risks…. The greater the volatility, the greater the potential for large gains and large losses.”
So far this year, the mid-caps have hit a sweet spot with investors, providing greater mobility than the stodgy large-caps and a little more stability than small-caps.
Investors interested in mid-cap focused ETFs can take a look at the iShares Core S&P Mid-Cap ETF (NYSEArca: IJH), the largest offering in the space. IJH tries to reflect the performance of the S&P MidCap 400 Index and comes with a 0.15% expense ratio. The ETF is up 2.5% year-to-date.
“Funds that track the S&P MidCap 400 Index are well-suited for those seeking to precisely control their equity exposure by market-capitalization range, as it is designed to fit between the large-cap S&P 500 and S&P SmallCap 600 in order to cover the vast majority of the U.S. equities market with minimal holdings overlap,” Rawson added.
Alternatively, the SPDR Mid-Cap 400 (NYSEArca: MDY) covers the same mid-cap index. However, due to the older unit investment trust structure, the ETF is less flexible than Regulated Investment Company fund structures found in most other ETFs, like IJH. Consequently, MDY can not lend shares or efficiently reinvest dividends. MDY also issues a costlier a 0.25% expense ratio. The fund is up 2.4% year-to-date.
The Vanguard Mid-Cap ETF (NYSEArca: VO) tries to reflect the performance of the CRSP US Mid Cap Index. CRSP’s weighting methodology differs from the S&P. Consequently, the average market for a stock in the underlying index is $9 billion, which is less than the $62 billion in the S&P 500 and a little more than the $4 billion for the S&P 400. VO is up 3.5% year-to-date and comes with a 0.10% expense ratio.
The Schwab U.S. Mid-Cap ETF (NYSEArca: SCHM) tracks the Dow Jones U.S. Mid-Cap Total Stock Market Index, which includes the 500 stocks by market cap after the largest 500. The average market-capitalization in the index is about $5.3 billion. SCHM is up 3.8% year-to-date and has a cheap 0.07% expense ratio.
Additionally, investors interested in a smart-beta offering can look at the First Trust Mid Cap Core AlphaDEX Fund (NYSEArca: FNX). The fund selects stocks from the S&P 400 Index, but chooses stocks based on growth factors, sales to price and one year sales growth, along with value factors like book value to price, cash flow to price and return on assets. Consequently, the ETF leans toward more small-cap names, which make up aout 40.2% of the portfolio. FNX is up 1.2% year-to-date and comes with a 0.66% expense ratio.
For information on middle-capitalization stocks, visit our mid-cap category.
Max Chen contributed to this article.