Mid-cap stocks and exchange traded funds have received ample attention this year and deservedly so. The S&P MidCap 400 Index is up 4.6% compared to a scant gain for the S&P 500.
Mid-caps outperforming large-caps is not new. From 2009 through 2014, the S&P 500 outpaced the S&P MidCap 400 on just two occasions. The downside of mid-caps lengthy spell of outperforming large-caps is that it is getting more difficult to find value in the mid-cap space.
Using dividends as mid-cap valuation metric can help unearth ETF opportunities, including the WisdomTree MidCap Earnings Fund (NYSEArca: EZM) and the WisdomTree MidCap Dividend Fund (NYSEArca: DON)
Mid-cap stocks and exchange traded funds have received ample attention this year and deservedly so. The S&P MidCap 400 Index is up 4.6% compared to a scant gain for the S&P 500.
Mid-caps outperforming large-caps is not new. From 2009 through 2014, the S&P 500 outpaced the S&P MidCap 400 on just two occasions. The downside of mid-caps lengthy spell of outperforming large-caps is that it is getting more difficult to find value in the mid-cap space.
Using dividends as mid-cap valuation metric can help unearth ETF opportunities, including the WisdomTree MidCap Earnings Fund (NYSEArca: EZM) and the WisdomTree MidCap Dividend Fund (NYSEArca: DON). [Leadership With Mid-Cap ETFs]
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. [Mid-Cap ETFs for the Long Haul]
Rather than emphasizing price-to-earnings, price-to-dividends, or share price relative to dividends, proves instructive with mid-cap ETFs. Notably, dividends in the WisdomTree MidCap Earnings Index are growing at 20% per year.
“This is the classic case of an index where the returns have been strong, but the dividend growth has been stronger. The result? The price-to-dividend ratio actually decreased over the past one-, three- and five-year periods,” according to a WisdomTree research note published Wednesday.
The WisdomTree MidCap Earnings Index has a P/E ratio of 18.4 compared to almost 21.7 on the S&P MidCap 400.
Growing mid-cap dividends have helped propel the $1.59 billion DON to a five-year gain of almost 81%, or nearly 850 basis points better than the S&P 500 over the same period. That out-performance has come on the back of superior dividend growth.
“Each of the mid-cap indexes shown had dividend growth faster than that of the S&P 500 Index over the past one-, three- and five-year periods. Large-cap and small-cap equities certainly get significant attention, but the strong levels of dividend growth are one reason we think mid-caps can also be exciting,” according to WisdomTree.
DON, which pays its dividend monthly, has a distribution yield of 1.95%. EZM, which has $737.5 million in assets under management, has a distribution yield of 1.07%. Shares of EZM have nearly doubled over the past five years and like DON, EZM has delivered superior dividend growth relative to traditional mid-cap benchmarks.
WisdomTree MidCap Earnings Fund
Tom Lydon’s clients own shares of DON.