A Quality, Income-Based Mid-Cap Idea | ETF Trends

Mid-cap stocks and the related ETFs were decent though not spectacular performers last year. While the group could be poised to rally this year, investors may want to consider taking a more quality-based approach to this market segment with income-generating ideas such as the ProShares S&P MidCap 400 Dividend Aristocrats ETF (CBOE: REGL).

REGL follows the S&P MidCap 400 Dividend Aristocrats Index, the dividend derivative of the S&P MidCap 400. The ProShares fund’s mandate is a minimum dividend increase streak of 15 years, which is high in the universe of mid-cap equities.

The mid-cap category has also outperformed their larger 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.

Entering 2020, however, broader mid-cap benchmarks showed elevated leverage relative to large-cap counterparts, something REGL’s quality approach can investors avoid.

“Within the United States, mid- and small-cap stocks are also trading at substantial P/B discounts to U.S. large caps.” said Simeon Hyman, ProShares global chief investment strategist, in a recent note. “One challenge: leverage. U.S. mid caps have roughly double the leverage of U.S. large caps, and small caps roughly triple. Focusing on quality mid- and small-caps with less leverage may be a prudent way to approach the opportunity.”

Diversified Mid-Caps

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.

Fortunately, companies in REGL’s underlying index have lower leverage than what’s found on the S&P MidCap 400 Index.

“Dividend growth also offers a solution to the higher leverage of mid- and small-cap stocks, with the S&P 400® Dividend Aristocrats® and the Russell 2000 Dividend Growth indexes having substantially lower leverage than the S&P MidCap 400 and Russell 2000® respectively,” said Kieran Kirwan, Senior Investment Strategist at ProShares.

The ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV) follows the Russell 2000 Dividend Growth Index, the divided growth offshoot of the Russell 2000.

For more on core investing strategies, visit our Core ETF Channel.

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.