Investors looking for a good deal on mid-cap exchange traded funds do not have to look far as the ETF fee battles have permeated the mid-cap arena. For example, the Schwab U.S. Mid-Cap ETF (NYSEArca: SCHM) is cheap by any standard, mid-cap or otherwise.
Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized 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.
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.
SCHM, which is more than six years old, holds just over 500 stocks and tracks the Dow Jones Total Stock Market Mid-Cap Index.
“The fund outpaced the mid-cap blend category by 1.8 percentage points annually from its inception in January 2011 through September 2017,” according to Morningstar. “The fund’s risk-adjusted returns, as measured by its Sharpe ratio, also landed in the category’s top quintile over the same period. Much of this relative outperformance can be attributed to the fund’s sizable fee advantage and smaller-than-average cash drag. Because the fund remains fully invested, it may suffer larger drawdowns during market downturns, but during bull markets the strategy should pay off.”
When looking at equity market exposure, investors may find that large-cap stocks are too big for rapid growth and small-caps may expose them to more volatile short-term moves, but middle capitalization stocks and related exchange traded funds may be just right.
Middle capitalization stocks, or sometimes referred to as the market’s sweet spot, could help investors achieve improved risk-adjusted returns. Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized 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.
SCHM “offers efficient, well-diversified exposure to mid-cap stocks. Its top 10 holdings represent around 4% of the portfolio,” said Morningstar. “Because the Dow Jones U.S. Total Stock Market Mid-Cap Index is not widely followed, the market impact costs to move securities into and out of the index are lower than the costs some of its more popular peers incur. The underlying index introduced new liquidity requirements in June 2015. Now, 10% of a stock’s shares must trade publicly before it can be added to the index.”
Related: One of 2017’s Hottest Themes in ETF Space
Another mid cap ETF play is looking to smart beta options for traditional exposure to the S&P MidCap 400.
One example is the Oppenheimer Mid Cap Revenue ETF (NYSEArca: RWK) selections components from the broad basket of S&P MidCap 400 stocks but reweights holdings based on each company’s revenue, producing a portfolio that could potentially provide a better representation of companies’ economic contribution to the benchmark index.
Due to the revenue-weight tilt, investors won’t be exposed to trendy, overpriced stocks that market cap-weighted indices are prone to be, and investors will hold companies with more attractive valuation characteristics with a slight value tilt. By rebalancing the portfolio every quarter towards companies that have had persistent sales, revenue weighting keeps the portfolio from getting ahead of itself in overheating market conditions.
For more information on mid-caps, visit our mid-cap category.