Mid-cap stocks and exchange traded funds can be glossed over compared to large- and small-cap equivalents, but the long-term performance of some mid-cap ETFs should not be ignored. The WisdomTree U.S. MidCap Earnings Fund (NYSE: EZM) proves as much.
EZM, which celebrates its 11th birthday this week, follows the WisdomTree U.S. MidCap Earnings Index. That index “is earnings-weighted in December of each year to reflect the proportionate share of the aggregate earnings each component company has generated. Companies with greater earnings generally have larger weights in the index,” according to WisdomTree.
In other words, while the company with the largest market value will get the largest weight in the cap-weighted S&P MidCap 400 Index, the most profitable companies command the largest allocations in EZM and its underlying index.
No Argument Here
EZM's weighting methodology is undoubtedly unique. It is also undoubtedly effective. Over the past decade, the ETF beat 100 percent of rival mid-cap funds, including actively managed mutual funds, in the relevant Morningstar peer group.
Since inception, EZM's underlying index nearly tripled a $10,000 investment, turning that hypothetical stake — one cannot invest directly in an index — into $29,157 compared to $10,000 in the S&P MidCap 400 morphing into less than $27,000. EZM's index outpaced the mid-cap benchmark over the past 12 months, five and 10 years.
“The overarching goal of the WisdomTree Index has been the same all along: to unshackle the investor from needing to invest at whatever the market’s earnings yield is by rebalancing annually with a process aimed at actually raising the earnings yield compared to a similar market cap-weighted index,” said WisdomTree in a recent note.
EZM offers significant sector-level differences compared to the S&P MidCap 400. For example, the WisdomTree fund devotes 22.7 percent of its weight to consumer discretionary names while the S&P MidCap 400 has 12.1 percent in that sector. EZM is also overweight industrials and underweight financial services and technology stocks relative to the S&P MidCap 400.
EZM's strategy also keeps the value factor in play. For example, EZM's index has traded at 26.5 percent price-to-earnings discount to the S&P MidCap 400 since inception, according to WisdomTree data.
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