Surprising Income Potential With a Small/Mid Multi-Factor ETF

Smaller stocks, including mid caps, aren’t often viewed as premier dividend destinations, but the group’s payout profile is changing for the better and the Principal U.S. Small-Mid Cap Multi-Factor Core Index ETF (PSM) is one way of harnessing that trend.

PSM is designed to provide broad index-aware U.S. small, mid-cap equity exposure while incorporating a multi-factor model and modified weighting process to potentially enhance the risk/return profile. Multi-factor model seeks to identify equity securities of companies in the Nasdaq US Small Cap IndexSM and Nasdaq US Mid Cap IndexSM that exhibit potential for high degrees of sustainable shareholder yield (value), pricing power (quality growth), and strong momentum. The Fund’s objective is to track the Nasdaq US Small Mid Cap Select Leaders Core IndexSM.

“In an environment where bond yields are at record lows, we believe that stocks in the mid-cap universe may be well-positioned to fill the income gap and provide an opportunity for capital appreciation,” according to Advisor Perspectives. “Generally, investors think that dividend-paying companies mostly exist in the large-cap universe. However, as shown below, there are numerous companies in the mid-cap universe that pay dividends.”

PSM Income Applications

With its focus on shareholder yield, PSM is arguably a better income idea than rival mid- and small-cap funds that are simply index strategies.

The three components of shareholder yield are good measures for shareholder friendliness. The trifecta helps investors target companies with a history of dividend growth, low debt, and the ability to support equity prices through share buybacks.

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.

While there is an ongoing debate regarding the superior method of shareholder compensation – buybacks or dividends – there is no denying dividend growth stocks have been less volatile while offering superior returns than those that do not grow dividends over the previous three decades.

Historical data confirm that Russell Midcap Index components that pay dividends and buyback stock outperform those that do neither or those that cut or suspend payouts.

For more on multi-factor strategies, visit our Multi-Factor 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.