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Why Should You Buy Mid-Cap ETFs

Sweta Killa

After peaking in early July, the U.S, stock market has been caught in a vicious circle of worries triggered by U.S.-China trade gyrations, steep decline in bond yields, global growth worries, geopolitical tension mainly aggravated by political unrest in Hong Kong, as well as a decline in Argentina's currency and stock markets.

However, rising hopes of monetary stimulus globally as well as renewed trade optimism has provided some relief to the stocks of late. This is especially true as major central banks across the globe are taking steps to prop up the slowing economic growth that have eased global recession concerns and in turn boosted investor confidence once again (read: ETFs Winners & Losers Halfway Through Q3). 

China’s central bank unveiled a key interest rate reform to lower borrowing costs for companies while Germany is ready to potentially free up 50 billion euros ($82 billion) of extra spending. The European Central Bank is expected to cut rates in September and resume a bond-buying program while the Federal Reserve might signal further rate cuts this year. Mexico is the latest country to jump on the interest rate cut bandwagon.

In the latest trade development, Washington extended a 90-day temporary license allowing China’s Huawei Technologies to continue doing business with U.S. firms.

Against such a backdrop, investors seeking to capitalize on the rebounding fundamentals but worried about uncertainty should consider mid-cap stocks in the basket form (see: all the Mid Cap ETFs here).

Why Mid-Caps?

While large companies are normally known for stability and the smaller ones for growth, mid-caps offer the best of both worlds, allowing growth and stability in portfolios simultaneously. Additionally, these middle-of-road securities have relatively less exposure to international markets compared to large caps, thereby making them good bets in the current market turmoil. Further, mid-cap stocks are less volatile than small caps. Thus, these stocks are currently a safer option and have higher upside potential.

While there are several ETFs available in the space, we have highlighted some solid choices that have a strong Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting outperformance in the months ahead. These have potentially superior weighting methodologies that could allow these to lead the mid-cap space in the months ahead.

iShares Core S&P Mid-Cap ETF IJH

This is the most popular ETF in the mid-cap space with AUM of $48.6 billion and average daily volume of 1.1 million shares. It tracks the S&P MidCap 400 Index and holds 400 stocks in its basket with none accounting for more than 0.77% share. The fund is also widely diversified across sectors with financials, information technology, industrials, consumer discretionary and real estate taking double-digit allocation each. It charges 7 bps in annual fees and has a Zacks ETF Rank #2.

iShares Russell Mid-Cap Growth ETF IWP

With AUM of $11 billion, this ETF tracks the Russell MidCap Growth Index. It holds 398 securities in its basket with none accounting for more than 2.02% of the total assets. It has key holdings in information technology, making up for 32.8% exposure while industrials, consumer discretionary, and health care round off the next three spots. It charges 24 bps in annual fees and trades in average daily volume of 403,000 shares. The product has a Zacks ETF Rank #1 (read: ETF Assets Swell in July: What's Hot, What's Not).

iShares S&P Mid-Cap 400 Growth ETF IJK

This product offers exposure to 245 mid-cap stocks whose earnings are expected to grow at an above-average rate relative to the market. It follows the S&P MidCap 400 Growth Index, charging investors 24 bps in annual fees. The ETF is widely spread out across components with none of the securities holding more than 1.5% of the assets. It is slightly skewed toward information technology sector at 19.4% while healthcare, consumer discretionary, industrials, and real estate receive double-digit exposure each. IJK has amassed $7.4 billion in its asset base while trading in average daily volume of 81,000 shares. It has a Zacks ETF Rank #1.

Vanguard Mid-Cap Growth ETF VOT

This fund follows the CRSP US Mid Cap Growth Index, holding 178 securities with none accounting for more than 1.4% share. In terms of sector exposure, industrials occupies the top position at 25.9%, followed by technology (22.8%), financials (17.5%), and health care (11.6%). The product has managed nearly $6.5 billion in its asset base and trades in good volume of around 148,000 shares a day on average. It charges 7 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook (read: ETF Strategies to Win If Powell Enacts Rate Cuts).

Vanguard Mid-Cap ETF VO

This ETF tracks the CRSP US Mid Cap Index, charging investors 4 bps in fees per year. It has amassed $26.6 billion in its asset base while seeing a solid volume of about 420,000 shares per day on average. The fund holds 368 stocks with a well-diversified portfolio as each firm holds no more than 0.7% of total assets. Financials is the top sector with 21.1% share while industrials, technology and consumer services round of the next three spots. The product has a Zacks ETF Rank #1 (read: Vanguard Takes ETF Fee War a Step Forward).

SPDR S&P 400 Mid Cap Growth ETF MDYG

This ETF follows the S&P Mid Cap 400 Growth Index, holding 245 stocks in its basket. It is widely diversified across components with each accounting for less than 1.5% share. Information technology is the top sector with 19.4% of the assets, while healthcare, consumer discretionary, industrials, and real estate also receive double-digit exposure each. MDYG has $1.7 billion in AUM and trades in volume of around 96,000 shares a day on average. It charges 15 bps in annual fees and has a Zacks ETF Rank #1.

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