Mid-cap stocks are often said to be overlooked relative to their large- and small-cap peers. Throw environmental, social, and governance (ESG) into the equation, and it’s not a stretch to say that many investors aren’t aware of this potentially potent combination.
Thanks to the newly minted IQ Candriam ESG U.S. Mid Cap Equity ETF (IQSM), investors can efficiently access the mid-cap/ESG combination. IQSM debuted in late October and follows the IQ Candriam ESG US Mid Cap Equity Index.
That could amount to good timing because quiet as it has been kept, mid-cap stocks are performing less poorly than large-cap rivals this year, and some market observers expect that condition will carry over into 2023.
“However, beneath the surface the picture is very different. This is because a change in market leadership is underway which we think will continue into 2023, and potentially longer. Although large caps outperformed strongly in January 2022, since then small and mid caps have been steadily outperforming,” according to Schroders research.
IQSM holds 211 stocks, none of which exceed a weight of 1.3%, indicating that approximately half the universe of the S&P MidCap 400 Index has ESG credentials strong enough to enter this ETF.
IQSM is potentially appealing to long-term investors because mid-cap stocks, over long holding periods, often outperform large- and small-cap names with less volatility than smaller stocks. By introducing the ESG overlay, IQSM could ratchet up those favorable traits. Additionally, an equity market regime change could be a 2023 catalyst for IQSM.
“Over much of the last decade, investing exclusively in the S&P 500 would have been the best decision. However, change is now underway. There are now good reasons for investors to broaden their allocations into mid and small cap US companies that are more attractively valued and better positioned for a changing market environment,” added Schroders.
IQSM also isn’t as growth-heavy as large-cap ESG ETFs. In fact, the mid-cap ETF has some value traits, which could be useful, as some market observers expect value will continue outpacing growth next year. For example, industrial, financial services, and healthcare stocks combine for over 44% of IQSM’s roster. Plus, mid-caps offer an often-overlooked size advantage.
“It’s also important to remember, given the size of the US economy, even ‘small’ US-focused companies are large by international standards. This is important at a time when investors are rediscovering risk, as liquidity tightens due to rising interest rates, triggering a range of stresses. With market valuations ranging up to $20 billion, however, US small and mid caps are a well-traded and liquid asset class full of opportunities,” concluded Schroders.
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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.