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Don’t Forget Mid-Cap Funds or Fees on Those Funds

Mid-cap stocks and funds are often overlooked relative to large- and small-cap equivalents. Historical data confirm that should not be the case because mid caps typically outperform larger stocks while delivering less volatility than smaller stocks.

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.

Many advisors and investors mulling mid caps are apt to embrace funds, be it an actively managed mutual fund or passive exchange traded fund, in an effort to avoid stock picking among mid-cap stocks. That is a sensible approach, but one that warrants caution when it comes to fees.

Take the case of the Dreyfus Active Midcap Fund Class A (DNLDX). This is a venerable active mid-cap fund with a track record dating back to 1985, but that track record comes with a cost. Literally. DNLDX charges 1.13% per year, or $113 on a $10,000 investment.

Why Correlations Matter

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.

Using correlations data from Raltin, advisors can find lower-cost alternatives to DNLDX that are highly correlated to that mid-cap fund. A fine alternative to DNLDX is the Schwab U.S. Mid-Cap ETF (SCHM A), which has a five-year correlation to DNLDX of 0.92, according to Raltin data. SCHM, a basic mid-cap blend fund, charges just 0.05% per year, or $5 on a $10,000 investment, and advisors that custody with Schwab can trade the ETF commission-free on the firm’s ETF OneSource Platform.


The iShares Core S&P Mid-Cap ETF (IJH A-), one of the largest domestic mid-cap ETFs, also has a five-year correlation to DNLDX of 0.92, according to Raltin data. IJH tracks the widely followed S&P MidCap 400 Index and charges just 0.07% per year.

Advisors looking for alternatively-weighted mid-cap ETFs that can be suitable replacements to actively managed funds have plenty of alternatives as well. The First Trust Mid Cap Core AlphaDEX Fund (FNX C), has a five-year correlation to DNLDX of 0.90, according to Raltin data.

FNX pulls its holding from the S&P MidCap 400, but picks those names based on growth factors, sales to price and one year sales growth, along with value factors like book value to price, cash flow to price and return on assets. The fund charges 0.62% per year, which is pricey compared to cap-weighted mid-cap ETFs, but still a favorable price point compared to many active mid-cap funds.

For more information on middle capitalization stocks, visit our mid-cap category.

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Click here to read the original article on ETFdb.com.