With trade tensions running high, investors may look to reduce portfolio volatility by focusing on dividend growth stocks while paring that concept with assets, including mid-cap stocks, that are more focused on the domestic economy.

The ProShares S&P MidCap 400 Dividend Aristocrats ETF (CBOE: REGL) is one of the leaders among mid-cap dividend exchange traded funds (ETFs).

REGL, which recently turned four years old, follows the S&P MidCap 400 Dividend Aristocrats Index. That is the dividend aristocrats offshoot of the widely followed S&P MidCap 400 Index The fund recently added some new mid-cap dividend names to its roster, solidifying its roster at 52 members. To be eligible for inclusion in REGL and the underlying index, mid-cap stocks must have dividend increase streaks of at least 15 years.

“The first quarter’s stock market rally continued right through April, with all equity market segments registering gains for the month,” said Simeon Hyman, ProShares global investment strategist, in a recent note. “Concerns regarding an earnings recession were mitigated as Q1 earnings registered very modest gains. Stronger than expected economic indicators provided a boost as well.”

A Strong Case For Mid Caps

Over a long-term horizon, though, mid-caps have outshined the competition. Since 1996, the S&P MidCap 400 generated an average annual return of 10.4%, compared to 7.3% for the S&P 500 and 9.7% for the SmallCap 600.

Dividend growth rather than high yield can be a potent, less risky long-term income strategy. Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Consequently, these quality dividend ETFs try to limit the impact of these value traps by requiring a history of sustainable dividend growth.

“Mid-caps, perhaps the most overlooked equity market segment, deserve a look heading into the second half of 2019,” said Hyman. “Mid-caps have long outperformed the S&P 500, with the S&P Mid-Cap 400 returning over 2% more annualized return than large caps since the year 2000.”

Still, mid-cap stocks have recently been lagging large caps, but margin pressure on the former could be abating and that is an important factor to consider.

“However, mid-caps have underperformed over the last five quarters, from Q1 2018 through the first quarter of 2019,” adds Hyman. “Of note, S&P 500 margins were still expanding in the fourth quarter of 2018, while S&P Mid-Cap 400 margins declined noticeably. It may be that some of the downward pressure from shrinking margins that has yet to come for large-cap stocks may be in the rearview mirror for mid-caps.”

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

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