Likely due in large-part to significant exposure to financial services stocks and lack of big allocations to the technology sector, traditional mid-cap equity indexes are trailing the large-cap S&P 500 on a year-to-date basis.
That doesn’t mean investors should ignore mid-caps. Actually, some market observers argue now is an ideal time to consider stocks in the middle. That could signal opportunity for exchange traded funds offering fresh approaches to mid-cap investing, including the newly minted Calvert US-Mid Cap Core Responsible Index ETF (NYSE Arca: CVMC).
CVMC, which debuted in January, follows the Calvert US Mid-Cap Core Responsible Index. Translation: CVMC is an environmental, social, and governance (ESG) spin on mid-cap equities, making it one of a smaller number of ETFs marrying those two concepts.
At the large-cap level, ESG is often associated with growth stocks. On the other hand, while there are plenty of mid-cap growth funds on the market, CVMC is more of a blend fund with ample value exposure, indicating it could be appropriate for the current market environment.
“While it’s something of a truism that value stocks grow more slowly than growth stocks, we see value companies as generally less reliant than growth companies are on capital markets to fund their growth,” according to Boston Partners. “Given that the cost of capital is much higher today in light of the U.S. Federal Reserve’s (Fed’s) battle to tame inflation with tightening monetary policy, we think low-valuation stocks with strong cash flow generation may have an edge over their growth counterparts as well as peer value companies with less attractive fundamentals.”
CVMC, which attempts to beat the Russell MidCap Index, is diverse as none of its holdings exceed a weight of 0.65%, confirming concentration risk is low. The weighted average market value of the ETF’s member firms is $19.84 billion. Beyond those metrics, CVMC’s value exposure is pertinent today because value stocks of across all market capitalization segments are unusually inexpensive.
“P/Es across the value stock segments have clearly been compressed to historical lows—even in the wake of value’s general ascendancy over growth stock performance, which began roughly in the post-pandemic period,” added Boston Partners.
Plus, CVMC combines ESG benefits with another primary perk of owning a diverse mid-cap fund: Exposure to stocks that are underappreciated, under-owned and not widely followed by sell-side analysts.
“Larger-cap companies have historically attracted more analysts, and the trading volume of the largest companies in large- and mid-cap indexes reveals a decided tilt toward large-cap stocks. Most investors, it turns out, are underexposed to mid-cap stock,” concluded Boston Partners.
For more news, information, and analysis, visit the Responsible Investing 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.