Mid-caps are often looked as the forgotten group among equities. Not as big as large-caps and perceived to be less volatile and growth-ier than small-caps, it is easy to understand why some investors gloss over mid-caps.
However, mid-caps should not be forgotten. Not when the group is sporting compelling economic growth and leverage to a rebounding U.S. economy.
“S&P Capital IQ believes mid-cap stocks, which have a combination of strong earnings growth prospects and income generation, should benefit. Constituents in the S&P Mid Cap 400 Index are expected to generate 20% earnings growth in 2014 and 18% growth in 2015. This is above the 8% and 11% growth expected for the S&P 500 Index,” said the research firm in a recent note. [A Steady Mid-Cap Offering]
That is to say while mid-caps should not be forgotten, the WisdomTree MidCap Earnings Fund (NYSEArca: EZM) should certainly be remembered.
Yes, the $596.5 million EZM qualifies as an alternatively-indexed or smart beta ETF, but rather than getting caught up in an off-putting war of semantics, investors would do well to focus on the advantages offered by EZM.
Those advantages include the WisdomTree MidCap Earnings Index (WTMEI), EZM’s underlying index, outpacing 99% of open-end peer funds over the past five years, according to Morningstar data.
As the concept of alternatively-weighted indexing has grown in prominence and the ETFs employing those strategies have swelled in size, fund purists have assailed the notion of smart beta, focusing more on what does not matter (labels, terminology and verbiage) and less on what does matter (performance).
In fact, EZM and the WisdomTree MidCap Earnings Index dispel the notion that the out-performance frequently offered by alternative indexing is attributable only to the size or value factors or a combination of the two. The WisdomTree MidCap Earnings Index does not exhibit size or value tilts.
“It may come as a surprise to some, but in many cases, fundamentally weighted indexes don’t make a value or size ‘bet.’ It very much depends on which index you are examining. When WisdomTree’s research team ran regressions on our core earnings- and dividend-weighted indexes in the U.S., it became clear that the only earnings-weighted index that had any sensitivity to the value factor was the small-cap earnings index,” wrote WisdomTree Chief Investment Officer Luciano Sircacusano in a recent issue of the Journal of Indexes.
Offers another advantage: Exposure to dividend growth among mid-caps.
“With a starting dividend yield just 15 bps higher than that of the S&P MidCap 400, the WisdomTree MidCap Earnings Index grew aggregate dividends nearly 2 percentage points faster than its cap-weighted peer. An additional 290 basis points of excess return resulted from capturing more of the market’s change in overall valuation,” according to Siracusano.
The WisdomTree MidCap Earnings Index currently yields 1.41% compared to 1.23% for the S&P 400 MidCap Index.
Additionally, mid-caps are growing faster and carry less debt than large-cap S&P 500 stocks. Moreover, mid-caps have greater access to capital markets than small-caps. [Mid-Cap ETFs Rally]
WisdomTree MidCap Earnings Fund
