Most of the market’s attention is focused on large-cap benchmarks or smaller company stocks. Investors should not leave opportunities on the table and look to mid-cap exchange traded funds as well.
Investors have a large-cap bias after years of outperformance in the asset category, Steven L. Deroian, head of ETF strategy for John Hancock, explained to ETF Trends in a call. Consequently, many are underexposed to other asset capitalizations and should consider ways to diversify their investment portfolios.
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, along with providing more stable stock prices. Additionally, they are not so big that their size would slow down growth.
The mid-cap category has also outperformed their larger 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.
As investors look over their equity market exposure, investors may find that large-cap stock positions are too big for rapid growth and small-caps may expose them to more volatile short-term moves, but middle capitalization stocks and related ETFs 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.
As the financial industry comes out with new and innovative ways for investors to access the markets, many will have to reconsider the way they gain market exposure. For example, the John Hancock Multifactor Mid Cap ETF (NYSEArca: JHMM), which tracks a factor-based index developed by Dimensional Fund Advisors, follows a rules-based selection process that is seen as a multi-factor approach, combining a number of factors in a single portfolio.
For instance, securities are adjusted by relative price and profitability. The underlying index may overweight stocks with lower relative prices and underweight names with higher relative prices. The index can also adjust for profitability by overweighting stocks with higher profitability and underweighting those with lower profitability.
JHMM’s top sector weights include information technology 17.9%, industrials 16.9%, financials 15.8%, consumer discretionary 13.0% and health care 9.4%. In comparison, the benchmark S&P MidCap 400 Index is more overweight financials, real estate and materials when compared to the smart beta JHMM portfolio.
For more information on middle capitalization stocks, visit our mid-caps category.