ETF Trends
ETF Trends

Mid-cap stocks and exchange traded funds are often glossed over relative to their large- and small-cap counterparts, but stocks the in the middle of the market capitalization spectrum have the potential to deliver handsome returns.

There are plenty of broad middle capitalization-weighted index exchange traded funds, but there weren’t any that specifically targets market sectors until now. In late December, Elkhorn Investments debuted the ETF industry’s first suite of mid-cap, sector-based ETFs, comprised of nine ETFs. Real estate and telecom are the sectors currently not represented in the suite.

“Mid-cap ETFs are looking for their day in the sun, but they seem to escape the spotlight on Wall Street – even though they’ve outperformed small-cap and large-cap investments,” reports TheStreet.com. Loosely defined as including companies that have a market capitalization of between $2 billion and $10 billion, mid-caps occupy the “sweet spot” on Wall Street, lodged between small-caps and large-cap stocks and funds. Historically, mid-caps have proven sweet for investors in a buy-and-hold investment strategy.

Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow and provide more stable stock prices. Additionally, they are not so big that their size would slow down growth.

The mid-caps segment has also outperformed their large-cap peers, but with lower volatility than small caps. Moreover, the returns of mid-cap stocks have also beaten those of small-cap stocks during the trailing three-, five-, and 10-year periods, with lower volatility.

The new mid-cap sector ETFs include the Elkhorn S&P MidCap Information Technology Portfolio (Bats: XK), Elkhorn S&P MidCap Health Care Portfolio (Bats: XH) and the Elkhorn S&P MidCap Financials Portfolio (Bats: XF). Each of the Elkhorn funds tracks an index that is the sector derivative of the widely followed S&P MidCap 400.

“Investors tend to construct their equity portfolios using a barbell approach and don’t view mid-caps, i.e. “the middle”, as something differentiated enough to add to their portfolios,” Elkhorn’s Graham Day told TheStreet. “This means they will often construct their equity portfolios with large-caps (relative safety) and small-caps (as a lottery ticket), believing this to be a balanced portfolio resulting in a significant underweight to mid-caps.”

Other members of the Elkhorn mid-cap sector suite include the Consumer Discretionary Portfolio (Bats: XD) and the Elkhorn S&P MidCap Energy Portfolio (Bats: XE).

For more information on mid-caps, visit our mid-cap category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.