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Best Mid-Cap Growth ETFs for Q2 - ETF News And Commentary

Zacks Equity Research

Despite global growth worries and the strength in the greenback, U.S. economic growth continued to climb steadily buoyed by recovering housing fundamentals, a healing job market and increasing consumer confidence. Though the growth rate in Q4 of 2014 fell shy of the impressive pace recorded in Q2 and Q3, the rate is still among the best in the developed market pack.

Investors should note that the major share of the domestic stock market rally this year can be attributed to small and mid caps as their larger counterparts were hard hit by a firm dollar and weaker exports (read: 3 Currency ETFs that Crumbled in Q1).

In such a situation, the Fed came up with a caution stance on domestic growth in its March meeting. The central bank also lowered the U.S. economic growth projection (considering the central tendency method) for 2015 from 2.6−3% (guided in December) to 2.3−2.7%. The growth projections for 2016 and 2017 were also cut to 2.3−2.7% and 2.0−2.4%, respectively, from 2.5−3% and 2.3−2.5% (read: ETF Winners and a Loser Post Fed Meeting).

If this was not enough, the U.S. economy also came up with wavering data points including the lower-than-expected ADP job reading. U.S. factory activity touched an almost two-year low with the index sliding to 51.5 in March from 52.9 in February. Per Reuters, GDP estimates for Q1 range from 0.8% to 1.2%, at the current level. In fact, analysts foresee ‘the worst earnings season in six years’ round the corner.

Such downbeat data appear to be seasonal as the U.S. was under snow coverage in Q1 which locked people indoors, refraining them from economic activity. Still, cautious investors may want to reshuffle their portfolio and look for ETFs suitable for the economic backdrop in Q2.

Why Mid Cap Growth?

Given the recent bout of volatility, we believe that a middle-of-the path approach would be an appropriate stance for Q2. This segment is neither overtly alert nor explicitly brave. Overall, situations are not favorable either for small cap growth ETFs due to the ongoing ‘moderation’ in the U.S. economy, or for the large caps due to the still sagging global economy and the potential strength in the U.S. dollar once the Fed tightens its policy.

This makes mid cap growth ETFs more intriguing as these offer the best of both worlds and get mileage out of a better U.S. growth rate among developed countries. We have found a number of ETFs that have a top Zacks ETF Rank in the mid cap growth space and are thus expected to outperform in Q2. These ETFs easily crushed the broader market in the last one month.

Guggenheim S&P MidCap 400 Pure Growth ETF (RFG)

This ETF provides targeted exposure to the growth segment of the U.S. mid-cap space by tracking the S&P MidCap 400 Pure Growth Index. The product has amassed $721.1 million in its asset base while sees light volume of less than 25,000 shares. The ETF charges 35 bps in annual fees from investors (see: all the Mid Cap ETFs here).

The fund holds 86 stocks, which are well spread across a number of securities as each firm holds less than 2.72% of total assets. From a sector look, Information Technology and Consumer Discretionary take the top two spots at 22.1% and 20%, respectively, while Financials, Healthcare and Industrials round of the top five. The ETF, with a Zacks Rank #2 (Buy), surged 4.3% over the past one month (as of April 7, 2015).

iShares S&P MidCap 400 Growth Index Fund (IJK)

The fund tracks the S&P MidCap 400/Citigroup Growth Index, holds about 225 companies in its basket, sees good volume, and charges investors a fee of 25 bps a year. The product is widely spread out across each security and sector. The fund has accumulated around $5.5 billion in its asset base.

In terms of sectors, Financials takes the top spot at roughly 23% of the total while Information Technology, Consumer Discretionary, Industrials and Health Care account for a double-digit exposure. IJK was up 3.7% in the last one week (as of April 7, 2015). This product has a Zacks ETF Rank #1 (Strong Buy) suggesting that it is poised to outperform in the long run and especially over other choices in the space.

Vanguard S&P Mid-Cap 400 Growth ETF (IVOG)

This fund also targets the growth segment of the U.S. mid cap equity market, by tracking the  S&P MidCap 400 Growth Index. Holding 226 securities in its basket, the fund is highly diversified across each component with none holding more than 1.9% share.

In terms of sector exposure, Financials occupies the top position at 22.4%, followed by Information Technology (20.8%) and Consumer Discretionary (16.5%). The product has managed over $370 million in its asset base and trades in paltry volume of around 20,000 shares suggesting added costs over and above the expense ratio in the form of a wide bid/ask spread (read: 3 Sector ETFs to Watch in Q2) .

Expense ratio came in at 0.20%. IVOG ─ a Zacks Rank #1 ETF ─ returned 3.9% over the past one month.

SPDR S&P 400 Mid Cap Growth ETF (MDYG)

This product offers broad exposure to the mid-cap segment of the broad U.S. stock market. It follows the S&P MidCap 400 Growth Index, holding 224 securities in its basket. The ETF puts a small allocation to individual securities and prevents heavy concentration. None of the holdings accounts for more than 1.34% of assets.

However, the fund is skewed toward the Financials sector at 22.3%, followed by Information Technology (19.04%) and Consumer Discretionary with 16% share each. The product is moderately popular with $235.3 million of assets and illiquid with average daily volume of about 10,000 shares per day. It charges 15 bps in fees per year from investors and added 3.6% in the trailing one-month period.

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