Allure of Mid-Caps Is Building | ETF Trends

As measured by the widely observed S&P MidCap 400 Index, mid-cap stocks aren’t doing much of anything this year. That index is up just 3% year-to-date, as of October 9, well off the pace set by the large-cap S&P 500.

At least mid-cap equities aren’t in the red. Mid-caps stocks and many of the related ETFs have cobbled together modest gains this year. But it could be the foundation of better things to come. Should that scenario play out in earnest, the Calvert US-Mid Cap Core Responsible Index ETF (CVMC) is an example of an ETF that could be a mid-cap leader.

Sector composition – something all investors should consider when evaluating passive investing strategies – hamstrung mid-cap funds in the first half of 2023. But that tide could be turning in favor of the group.

Mid-Cap Sector Composition Stars Could Align

In the first half of this year, technology stocks, namely the magnificent seven, drove the broader market higher. That was to the delight of investors holding ETFs and index funds linked to basic large-cap indexes. Why? Because those gauges typically allocate about 28% of their rosters to the tech sector.

Conversely, the tech rally was mostly a non-starter for mid-caps because the S&P MidCap 400 allocates less than 11% of its weight to that sector. To its credit, CVMC has a 16.12% weight to tech stocks. However, mid-cap ETFs are usually overweight industrial stocks relative to the S&P 500. That’s seen in CVMC, which devotes 22% of its weight to that sector.

For long-term investors, that could be a positive attribute. Some experts believe recent government stimulus efforts could, well, stimulate the industrial sector.

“The ramp-up in this capacity is in part the result of recent U.S. government stimulus spending, including the $1 trillion Infrastructure Investment and Jobs Act, the nearly $400 billion in clean energy spending in the Inflation Reduction Act,  and the $280 billion CHIPS and Science Act to boost the domestic chip-making industry and scientific research,” according to John Hancock Investment Management.

Many traditional small-cap ETFs also have significant industrials exposures, in many cases outpacing what’s found in the S&P 500. However, due to the quality profile of a fund such as CVMC and mid-cap industrials, mid-caps could be the preferred avenue for accessing that sector.

“Among those characteristics are strong balance sheets, more durable profitability, higher return on equity, and less need for capital in a period of higher borrowing costs. We view such characteristics as vitally important given today’s environment of slowing growth and recessionary risks. And we generally prefer mid-caps as an opportunity to pursue current exposure to industrials,” concluded John Hancock.

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