Don't Forget About Mid-Cap ETF Investing | ETF Trends

With the markets in recovery mode, the middle-capitalization category and related ETFs have been outperforming the S&P 500 as investors look to a cheap area to jump back into.

Among the largest mid-cap ETFs by assets, the iShares Core S&P Mid-Cap ETF (NYSEArca: IJH) rose 6.8%, Vanguard Mid-Cap ETF (NYSEArca: VO) gained 5.8% and SPDR Mid-Cap 400 (NYSEArca: MDY) increased 6.8% so far this year, compared to the 4.4% advance in the S&P 500.

Mid-cap stocks are now less expensive than smaller and larger peers after the stock market’s fourth quarter sell-off, the Wall Street Journal reports.

The S&P MidCap 400 index was trading at 14.3 times projected earnings over the next 12 months, compared to 18.2 times at the end of 2017, according to FactSet data. Meanwhile, the S&P 500 and the SmallCap 600 were hovering around 15.1 and 15.3 times forward earnings, respectively.

“Midcaps are the orphaned index,” Mark Fried, president of TFG Wealth Management, told the WSJ. “When we sit down with clients and look at their 401(k)s, it’s one of the areas that we see the least used, but it should be apart of it. Now is a good opportunity since that part of the market is down.”

Mid-caps have greater exposure

Susan Schmidt, head of U.S. equities and portfolio manager at Aviva Investors, said that mid-caps have underperformed their larger and smaller peers for the past year and are expected to generate lower earnings growth due to the composition of the index. Specifically, mid-caps have greater exposure to industrial and financial stocks, two areas that have taken a beaten during the trade tensions and slowing global economy. However, she argued investors should still take a second look due to the cheap valuations.