Exchange traded fund investors can customize their investment exposure with various asset class categories. For instance, there are three options that track the S&P MidCap 400 index, but the ETFs are not all the same.
The SPDR S&P MidCap 400 ETF (NYSEArca: MDY) is the most heavily traded middle capitalization-weighted ETF on the market, with an average 2.1 daily volume, according to Morningstar data. MDY has a 0.25% expense ratio. However, the State Street ETF may not be the most efficient mid-cap ETF available.
Specifically, MDY is organized as a unit investment trust, which is less flexible than the Regulated Investment Company fund structure, writes Morningstar analyst Michael Rawson. Specifically, MDY can not reinvest dividends.
Additionally, in the past decade through November, MDY has slightly underperformed the S&P 400 MidCap Index by an annualized 0.34 percentage points.
In comparison, the iShares Core S&P Mid-Cap ETF (NYSEArca: IJH), which also tracks the S&P 400 MidCap Index, only lagged the benchmark by 0.13 percentage points. The iShares offering has an average volume of 1.3 million shares and a 0.12% expense ratio.
IJH is structured as a Regulated Investment Company, which gives it an edge over the older MDY for investors seeking a good long-term mid-cap ETF position, Rawson argued. Nevertheless, due to its size and deep liquidity, many institutional investors still prefer trading large blocks of MDY.
“While traders continue to prefer MDY due to its heavy volume and deep options market, a lower expense ratio and structural advantages make IJH a better option for long-term investors in our view,” Rawson said. “Asset growth in this fund has improved liquidity to the point were trading costs between the two funds are comparably low.”
Lastly, Vanguard S&P Mid-Cap 400 ETF (NYSEArca: IVOO) is another option available. However, IVOO is the smallest of the bunch, with $352.1 million in assets and average volume of about 18,000 shares. The ETF has a 0.15% expense ratio.
Investors who are interested in filling out their portfolio with a mid-cap stock should be aware that middle-capitalization stocks are typically more volatile than their large-cap counterparts since the companies are less likely to hold competitive advantages to their peers, so the assets may be more sensitive business cycles. Moreover, U.S. mid-caps remain heavily correlated to large-caps and have historically only provided a minor diversification benefit to larger stocks.
For more information on middle capitalization-weighted stocks, visit our mid-cap category.
Max Chen contributed to this article.