Mid-cap stocks are often overlooked despite lengthy track records of outperforming large-cap benchmarks. Mid-caps are also overlooked as dividend plays, but the WisdomTree MidCap Dividend Fund (NYSEArca: DON) proves that should not be the case.
DON tracks the WisdomTree MidCap Dividend Index, which “is dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share,” according to WisdomTree.
“DON is a fund which aims to satisfy a demand for an investment with both growth potential and a focus on a material yield. Thus far, the fund has accomplished what it set out to do. DON follows an index which seeks to track results of the WisdomTree MidCap Dividend Index,” according to a Seeking Alpha analysis of the ETF.
Mid-cap companies are slightly more diversified than their small-cap peers, which allows many of the 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. Consequently, mid-caps have generated historically higher returns than large-caps, with higher volatility and higher beta, but at a lower ratio of return-to-risk than small-caps.
Unlike other dividend-paying stock ETFs, DON weights components based on the total dollar amount of dividends paid as opposed to others that weight components based on yield percentage. Weighting by dividends can help investors avoid financially strained companies with high yields.
The value tilt has also historically proven to provide a source of outperformance. Since 1927, mid-value stocks have outperformed the market by about 3 percentage points per year, according to data from the French Data Library.
The mid-caps segment has also outperformed their large-cap 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.
“The expense ratio right now is .38%. There are some great funds in the market with a materially lower ratio, but there are also funds with one that just makes you walk away. DON lies somewhere in the middle,” notes Seeking Alpha.
For more on smart beta ETFs, visit our smart beta channel.