There are increasingly credible reasons for midcap equities and related ETFs to shed their status as an overlooked asset class.
Should that happen, ETFs such as the WisdomTree U.S. MidCap Dividend Fund (DON) could come back into focus for advisors and investors. Midcap stocks, including DON holdings, are frequently glossed over relative to bigger and small counterparts. That has been heightened this year because the S&P MidCap 400 Index is trailing the large-cap S&P 500.
However, a variety of factors could bode well for smaller stocks and the ETFs holding them in the new year. Those factors include domestic reshoring efforts and rock-bottom valuations.
Midcap ETF DON Could Be Dandy in 2024
DON is a dividend ETF providing exposure to an asset class market participants often ignore. So investors may be well-served to take a long-term view of the fund. History confirms as much. Over the past three years, the fund sharply outperformed both the S&P MidCap 400 Index and the S&P 500.
Additionally, DON was less volatile than the midcap benchmark period over that span. That period also included DON trouncing the S&P SmallCap 600 Index while being noticeably less volatile than that gauge. Focusing on today and the coming months, depressed multiples on smaller stocks could augur well for midcaps and DON.
“The last time relative valuations were this cheap, and sentiment so poor, was followed by an outstanding period of absolute and relative returns for small and mid-cap companies,” according to Schroders. “In the seven-year period following the market peak in March 2000, small caps rose by more than 70% compared to a rise of less than 10% for large cap stocks.”
Small Stocks Have Been Resurgent
Adding to the poignancy of that history is that small stocks have proven resurgent against similar valuation backdrops regardless of what the broader economy is doing. That is to say that even if the U.S. economy sags a bit next year, DON could still be steady.
Moreover, midcap ETFs, including DON, are more diverse than many large-cap equivalents. DON, which sports a distribution yield of 3.14%, allocates no more than 1.20% to any of its holdings. Conversely, many large-cap gauges are heavily allocated to a small number of stocks, potentially exposing investors to more concentration risk than they bargained for.
“The S&P 500 has become increasingly concentrated in a very few mega cap tech companies. In fact, just a handful of US stocks have become so highly priced that they dwarf the value of entire markets. For example as of end August the “Super-7” US stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta – made up more of the global index MSCI ACWI than the markets of France, China, the UK and Japan combined,” concluded Schroders.
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