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.
The ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS: REGL) provides access to quality dividend growers in the mid-cap category. REGL tracks a mid-cap Dividend Aristocrats Index, which requires 15 consecutive years of increased dividends for inclusion.
The Oppenheimer Mid Cap Revenue ETF (NYSEArca: RWK) selects components from the broad basket of S&P MidCap 400 stocks but reweights holdings based on each company’s revenue, producing a portfolio that could potentially provide a better representation of companies’ economic contribution to the benchmark index. When comparing RWK to the benchmark S&P MidCap 400, the revenue-weighted ETF takes a greater tilt toward small-capitalization stocks and leans toward the value category.
The John Hancock Multifactor Mid Cap ETF (NYSEArca: JHMM) follows a rules-based selection process that is seen as a multi-factor approach, combining a number of factors in a single portfolio. Securities are adjusted by relative price and profitability. The underlying indices may overweight stocks with lower relative prices and underweight names with higher relative prices. The indices can also adjust for profitability by overweighting stocks with higher profitability and underweighting those with lower profitability. The underlying index also implements market-capitalization adjustments where it increases the weights of smaller companies within the eligible universe and decreases the weights of larger names.
For more information on middle capitalization stocks, visit our mid-cap category.