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Time to Buy Mid-Cap ETFs?

Northern Trust (NTRS) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

If you look at the recent asset inflow pattern of the ETF industry, you will find that large-cap ETFSPDR S&P 500 ETF Trust SPY shed about $1.34 billion in assets followed by Vanguard S&P 500 ETF VOO which saw an outflow of about $911.7 million in the week ended August 15, 2017.

Small-cap ETF iShares Russell 2000 ETF IWM is also in the loser’s league,having shed about $735.5 million in assets. However, SPDR S&P 400 Mid Cap Value ETF MDYV attracted about $364 million in assets in the week ended August 15, 2017 while SPDR S&P 400 Mid Cap Growth ETF MDYG raked in about $339.4 million in assets.

Why Investors Are Eyeing Mid-Cap ETFs

Many investors ignore mid-caps when it comes to their investing decisions. But they fail to realize that these offer the best of the both worlds – small and large caps. Mid-caps are safer than volatile small cap stocks but normally return more than large-cap stocks (read: Play US and Revenues with iShares' New Large-Cap ETF).

Large caps have wider foreign exposure while small-cap stocks are more domestically focused. Now, since tensions between President Donald Trump and North Korea’s leader Kim Jong-un are sky-high thanks to nuclear activity by the latter, large-cap stocks are likely to be slightly volatile at the current level (read: Multi-Asset ETFs for Uncertain Markets).

On the other hand, U.S. inflation has remained subdued. Housing starts dropped in July, thanks to a falloff in apartment construction. Residential starts plummeted almost 5%. Moreover, housing permits, which hint at future construction, tumbled 4%. This gives a hint of a shaky U.S. economic backdrop. Plus, several pro-growth promises of President Trump now look uncertain. Major proposed reforms like the health care bill, tax cuts and defense budget increase are still way behind enactment.

But not all readings have come in unfavorable for the domestic land. Job, manufacturing and retail data were upbeat. U.S. retail sales in fact registered the largest increase in seven months in July (read: Retail Sales Off to a Great Start to Q3: ETFs to Buy).

In short, the operating environment is mixed in the domestic land. This makes mid-cap ETFs more intriguing as these can get mileage out of gradual improvement in the U.S. economy as well as be part of an international macroeconomic rebound. Many mid-caps have some foreign exposure, but not at a heightened level. Thus, a softer dollar on a dovish Fed and a slowly improving U.S. economy make a winning combination for mid-cap ETFs.

Plus, large-cap stocks are guilty of overvaluation concerns. The S&P 500-based ETF SPY is up 10.5% so far this year (as of August 16, 2017). After such a sturdy rally, many are expecting a solid pullback. On the other hand, SPDR S&P MidCap 400 ETF Trust MDY has advanced just 4.2% in the year-to-date frame (as of August 16, 2017), making mid-caps more appropriate for a further rally.

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SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-R 2000 (IWM): ETF Research Reports
SPDR-SP4 MC GR (MDYG): ETF Research Reports
VANGD-SP5 ETF (VOO): ETF Research Reports
SPDR-SP MC 400 (MDY): ETF Research Reports
SPDR-SP4 MC VL (MDYV): ETF Research Reports
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Zacks Investment Research
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