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Mid-Cap ETFs Keep Shining


Still overlooked by many investors, mid-cap stocks and the corresponding exchange traded funds continue delivering impressive performances, proving that ignoring mid-caps can prove hazardous to a portfolio’s health.

Over the past three months, the SPDR S&P MidCap 400 ETF (MDY) and the iShares Core S&P Mid-Cap ETF (IJH) have slightly lagged the performance of the S&P 500, but mid-caps have a long-standing track of out-performance over broader U.S. indices.

“ Mid-caps stocks are also relatively neglected and often overlooked – to the detriment of equity investors who may miss out on holding future leaders in their respective industries before becoming better known large-cap names,” said S&P Dow Jones Indices Vice President Philip Murphy in a recent research note. The relative obscurity may be partially due to the academic focus on the size factor as a structural driver of returns. “Small Minus Big (SMB)”, as the Fama/French size factor is known, leaves no thought of “mid” as a way to drive long-term performance. Another reason may be the popularity of large-cap and small-cap benchmarks like the S&P 500 and Russell 2000.”

Investors should not interpret that to mean a play on mid-cap ETFs is one devoted to a small, thinly traded fund. MDY has almost $15.9 billion in assets under management, up from $15.1 billion at the start of June. IJH is an almost $22 billion ETF and the trailing three-month average daily volume on both funds averages out to about 1.8 million shares with relatively tight bid/ask spreads. [Mid-Cap ETF Opportunity]

“Mid-caps stocks, as a group, have some interesting characteristics. In many ways, they have the potential to offer the best of both worlds – possibly greater dynamism than grown-up siblings and more maturity than little brothers and sisters,” adds Murphy.

Regarding long-term out-performance by a mid-cap ETF, the WisdomTree MidCap Dividend Fund (DON) fits the bill. Since the March 9, 2009 market bottom, DON is up 341.3%, including paid dividends. MDY is up 279.2% over that period while the S&P 500 is higher by “just” 230.4%.

DON has continued impressing this year, so much so that by the end of the second quarter, only four other WisdomTree ETFs had delivered superior returns through the first half of this year.

While mid-caps are often prized for their growth traits, DON’s dividend-backed weighting methodology gives investors ample value exposure.

“ The P/E ratio for the WisdomTree MidCap Earnings Index is approximately 16.4x, about 15% lower than the 19.4x P/E ratio of the S&P MidCap400 Index and 16% lower than the 19.7x P/E ratio of the Russell Midcap Index,” said WisdomTree in a note out last month.

Investors have warmed to DON’s story. The ETF, which pays a monthly dividend, climbed to $1 billion in assets under management in May and has since risen to almost $1.2 billion. [Mid-Cap Dividend ETF Tops $1B in AUM]

WisdomTree MidCap Dividend Fund