As investors browse options to fill out their core portfolio positions, consider a smart beta exchange traded fund to gain exposure to the U.S. market’s sweet spot.
Middle capitalization stocks, or sometimes referred to as the market’s sweet spot, could help investors achieve improved risk-adjusted returns. 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. Over the long haul, mid-cap stocks have historically outperformed their large-cap peers and wit.
As an alternative to traditional market-cap weighted indexing methodologies, investors can consider a smart beta strategy that weights components based on fundamental factors that could potentially enhance returns and diminish drawdowns during market turns.
For instance, the WisdomTree MidCap Earnings Fund (NYSEArca: EZM) tracks an earnings-weighted index that screens for positive cumulative earnings over its most recent four fiscal quarter period and assigns weights to components to reflect the proportionate share of the aggregate learning’s each company generated, so those with greater earnings have larger weights. Due to this particular indexing methodology, the ETF leans toward value, quality factors and the size factor, which have all been historically associated with excess returns compared to the broader market over the long-haul.
The First Trust Mid Cap Core AlphaDEX Fund (NYSEArca: FNX) selects stocks from the S&P 400 Index, but chooses stocks based on growth factors, sales to price and one year sales growth, along with value factors like book value to price, cash flow to price and return on assets. Consequently, the ETF leans toward more small-cap names.