Highlighting the out-performance delivered by mid-caps this year, the SPDR S&P MidCap 400 ETF (NYSEArca: MDY) is up nearly 3% year-to-date while the S&P 500 is saddled with a small loss.
Mid-caps are less vulnerable to the strong dollar and companies with market values in the $2 billion to $10 billion range are often prime acquisition targets for their larger peers. With those catalysts and others buoying mid-caps, a new exchange traded fund could prove to be a well-timed idea, particularly with its dividend backstop.
The rotation into mid-caps is fueled by perceived currency risks that large-caps are exposed to – large multi-national U.S. corporations may see revenue streams diminish as overseas currencies continue to depreciate against the U.S. dollar.
In its ongoing expansion of its non-leveraged lineup, Direxion introduced the Direxion Value Line Small- and Mid-Cap High Dividend ETF (NYSEArca: VLSM) last week, bringing some new competition to the thinly populated arena of mid-cap dividend ETFs. [Direxion Expands Non-Leveraged Lineup With Dividend ETFs]
VLSM emphasizes above-average dividend payers that sport favorable risk profiles. The new ETF is benchmarked to the Value Line Small- and Mid-Cap High Dividend Yield TR Index (VLSMT). Although the index and the ETF include small-caps, mid-caps are the dominant theme as those stocks account for over 84% of VLSM’s underlying index.
The equal-weight index “is composed of 50 small- and mid-cap securities selected using criteria based on Value Line’s Timeliness1, Performance2, and Safety Ranks3, and the Financial Strength Rating,” according to Direxion. Value Line reviews the index weekly and stocks will be removed if their financial health rapidly weakens or if their Value Line safety and timeliness ranks fall.
Despite some obvious advantages, some investors have a tendency to ignore mid-caps.
“Mid-caps stocks are also relatively neglected and often overlooked – to the detriment of equity investors who may miss out on holding future leaders in their respective industries before becoming better known large-cap names,” said S&P Dow Jones Indices Vice President Philip Murphy in a research note published last year. [Mid-Cap ETFs Keep Shining]
While mid-caps are often prized for their growth traits, VLSM has the look of a value ETF. Richly valued utilities and consumer staples stocks combine for over 13% of the ETF’s weight, but VLSM also allocates almost 44% of its weight to financial services, one of the sectors that is currently attractively valued relative to the broader market.
VLSM’s top 10 holdings include CVR Partners (NYSE: UAN), Domtar (NYSE: UFS) and Tupperware (NYSE: TUP). Eight of those 10 stocks yield over 3% and three yield over 8%.