Top Ranked Mid Cap ETF in Focus: PXMV

The third quarter ended on a strong note, as markets finished the period broadly higher. However, a surprise ‘No Taper’ announcement from Bernanke & company and major concerns over the first government shutdown in seventeen years (not to mention the debt ceiling) look to make the next few weeks a bit more volatile.

Investor apprehensions about the government shutdown have shifted the markets, and now many are in search of safer avenues to make profits under this uncertain situation.

Such an environment suggests earnings will be a big focus and the well-performing companies on this front will be the main drivers for the broader markets going forward.

Given this broad based weakness, investors shouldn’t be surprised to note that ETFs of a variety of cap levels have been under pressure lately. In fact, large caps which have been playing their dominant role for long seem to have lost steam.

At this time, investors could look for mid-cap ETFs which can offer the best of both worlds, allowing for both growth and stability in many portfolios (Read: Mid Cap ETF Investing 101).

Given this backdrop, a focus on mid-caps in Q3 earnings could prove to be beneficial, and this can easily be done by looking at the Zacks ETF Rank.

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, and 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 these also receive one of the three risk ratings, namely, Low, Medium or High.

The aim of our models is to select the best ETF 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 (see more in the Zacks ETF Center).

For investors seeking to apply this methodology to their portfolio in the mid-cap segment, we have taken a closer look at the top ranked PXMV. This ETF, has a Zacks ETF Rank of 1 or ‘Strong Buy’, is detailed below.

PXMV in Focus

Launched in March 2005, PowerShares Fundamental Pure Mid Value (PXMV) is an actively managed fund designed to track the performance of the RAFI Fundamental Mid Value Index. The fund generally will invest at least 90% of its total assets in the component securities that comprise the benchmark.

The Index comprises common stocks of "mid value" U.S. companies, including real estate investment trusts (REITs), from a universe of 2,500 largest U.S. companies based on fundamental weight. Since its inception, the ETF has amassed $36.3 million in assets (Read: 3 Top Ranked Mid Cap ETFs to Buy Now).

The product holds about 237 securities in its portfolio. The fund is well diversified across individual holdings as it only puts about 10.64% in its top 10.

Though the fund is a pure play in mid-cap stocks, it also allocates some assets to large-cap and small-cap companies. Style-wise, PXMV is tilted more towards value stocks, while a thin share is taken by growth stocks.

From an individual holdings point of view, the top 3 fund holdings are Yahoo! Inc., Rite Aid Corp. and L Brands Inc. The fund does not allocate more than 1.32% in individual holdings, so it is definitely well spread-out.

In terms of sector exposure, Consumer Discretionary, Financials and Industrials take the top 3 spots with 20.75%, 22% and 12% allocations. The other top sector holdings of the fund include Materials, Utilities and Information Technology, all of which make up at least 8% of assets (Read: 3 Sector ETFs to Watch for the Budget Battle).

Given its average trade size, the product is not as popular as its counterparts, trading in a low average daily volume of 8,600 shares a day. The fund is easy on the pocket, charging investors 39bps in fees.
PXMV has a Beta of 0.96 and an R-Squared of 84% versus the S&P 500 Index. The product has gained popularity against its counterparts thanks to its impressive returns.

The ETF has given robust returns of about 29% year to date and 34.6% on a one-year basis. Furthermore, the product also pays quite a decent dividend yield of 1.72% annually (Find all Mid Cap ETFs).

From technical aspects, the product is hovering above its 50 & 200 Day Moving Average and in terms of price performance the product has appreciated quite strongly, especially when compared to others in the space.

We have compared the one-year performance of PXMV against the leaders in large-cap ETF SPY and mid-cap ETF IWS in the chart given below:



The Bottom Line

Investors should note that investing in mid-cap equity ETFs offer an attractive long-term risk/return trade-off. Mid caps have outperformed small stocks over the past two decades. In fact, in terms of volatility they have performed better than the large caps.

Given the solid track record, investors shouldn’t ignore this space and may want to consider an allocation to the market cap level via investing in mid cap ETFs like this outperforming PXMV.

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