Mid-cap value ETFs are ideal for investors seeking equity appreciation with a lower level of risk. This is especially true in the dividend ETF world, as many top income funds have seen huge inflows in the recent past amid rock-bottom interest rates.
Although interest rates over the past few months increased on market speculations about the Fed’s Taper decision, the surprising ‘Taper Hold’ announcement on September 18th will again pull interest rates down. Anticipating a lower interest rate environment in the near term, we foresee investments in dividend paying equities as enticing options.
Further, with the macro environment in disarray, many companies are presently avoiding extensive capital investments and are instead returning extra cash to investors through dividends and share repurchases (Read: Mid Cap ETFs Leading the Market in 2013).
Coming to capitalization, past records show that relatively smaller companies bounce back in a bull market faster than the larger ones. Hence, with the Fed’s ‘Zero Taper’ triggered the stock market rally, we might see an upturn in mid-and-small companies in the near term.
In the spectrum of small-mid-large caps, mid-cap ETFs are often ignored more than their small or large-cap counterparts, both of which have managed to establish a stronger asset base.
While large companies are normally known for stability and the smaller ones for growth, mid caps are arguably safer options for considerable growth, with less risk than their small-cap counterparts (Read: 3 Top Ranked Mid Cap ETFs to Buy Now).
Naturally, investor focus has shifted toward mid-caps which have picked up momentum on the ongoing bullish market sentiment. In fact, all funds in the mid-cap value equities space such as the iShares Russell Midcap Value Index Fund (IWS), iShares S&P MidCap 400 Value Index Fund (IJJ) and WisdomTree MidCap Dividend Fund (DON) carved out smart gains of over 20% on a year-to-date basis.
Given this bullish trend, a look at some of the top ranked ETFs in the space could be a good way to target the best of the segment. In order to do this, investors can look at the Zacks ETF Rank and find the top mid-cap value ETF.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read: Zacks ETF Rank Guide). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the mid-cap value space, we have taken a closer look at the top ranked DON. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ (see the full list of top ranked ETFs) and is detailed below:
DON in Focus
Launched in June 2006, the WisdomTree Mid-Cap Dividend fund seeks to provide exposure to the performance of WisdomTree MidCap Dividend Index (read Mid Cap ETF Investing 101). The Index includes companies that make the top 75% of the market capitalization of the WisdomTree Dividend Index after removing the 300 largest companies.
The fund is modestly popular in the mid-cap value space with more than $787 million in assets. The fund trades in volumes of about 75,000 a day.
The choice is not very expensive as it charges 38 basis points in fees a year which is slightly higher than the average expense ratio in the mid-cap value space. Relatively light trading volume led to slightly higher expenses.
In terms of sector exposure, financials (23.6%) and consumer discretionary (18.5%) get considerable allocation in the fund, while utilities (15.8%) and industrials (13.2%) round out the top four. Stocks are also well diversified from an individual holding perspective, thus minimizing company-specific risks, as no single company makes up more than 2.11% of assets (see Create a Diversified Portfolio Using ETFs).
In fact, we have a ‘Low’ risk outlook for DON for the near term. However, low risk does not necessarily mean low returns. The product also paid an annual dividend yield of 3.24% on September 23, 2013, the highest among the all funds in the mid-cap value space.
Since third-quarter 2012, investors’ appetite returned to riskier assets, leading to a dream run for mid and small-caps funds. DON has returned around a handsome amount of 24.2% in the last one year ended June 30, 2013. DON hit a low of $54.06 and is currently trading around its 52 week high, giving the fund a return of roughly 23.5% in the last one year period.
Based on our research, mid-cap ETFs need a closer look now. As far as DON is concerned, it is nice combo of high dividend yield and the potential to give investors an above-average market return.
Also, DON could be a winner thanks to its high exposure to the financial sector – the star performer last earnings season – and consumer discretionary, which is likely to rebound nicely from a dip, meaning this could definitely be an ETF worth a closer look in the tail end of the year.
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Read the analyst report on IWS
Read the analyst report on IJJ
Read the analyst report on DON
Zacks Investment Research
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