If there is one part of the market that is always overlooked by investors, it is certainly mid caps. This capitalization level is passed over by investors looking for growth, while it is also shunned by those seeking stability in their equity portfolios.
However, now might just be the perfect time to take a closer look at this market cap level, especially considering some of the trends in the market.
Small caps are currently facing weakness as a bit of a risk off trade enters the market, while many smaller hot stocks are going through another consolidation phase as well. Meanwhile, large caps, thanks to their heavier foreign exposure, could be hit by a stronger dollar, European worries, and emerging market uncertainty.
In this type of environment, mid caps can straddle the line and offer a ‘best of both worlds’ scenario. Many mid caps have a little bit of foreign exposure, but not an overpowering level, while they can still offer up growth potential as well.
How to Invest in Mid Caps
Many investors don’t really know where to begin for mid caps, but ETFs offer up a variety of ways to tackle this overlooked part of the market. In fact, there are literally dozens of mid cap funds currently trading, giving exposure to various styles including ‘broad’, ‘value’, and ‘growth’.
With such a large number of choices though, it may be difficult to narrow down seemingly very similar funds. After all, many of these products target the same securities though they have different tilts, weighting schemes or focuses for their portfolios.
What’s an Investor to do?
One way to narrow down the list is to utilize the Zacks ETF Rank. This system looks to help find the best ETFs in a given market segment based on a number of factors including market outlook, expenses, and tradability.
And given the rise of the outlook for mid caps as of late, it shouldn’t be too surprising that a few have moved from Zacks ETF Rank #3 (Hold) to Zacks ETF Rank #2 (Buy) in the latest ratings update. Below, we have highlighted these three surging funds in brief detail for investors seeking a way to make a great play on the overlooked mid cap space in basket form:
Vanguard Mid-Cap Value ETF (NYSE:VOE)
This fund looks to track the CRSP US Mid Cap Value Index, using a passive management, full-replication approach. The product has just over 200 stocks in its basket, spreading out assets very well as just 11.2% of assets are in the top ten holdings.
Financials are the top holdings in this ETF, accounting for 23.5% of assets, followed by consumer goods, and industrials at around 14% each. The fund is very light in telecoms, while it is sparse in basic materials and technology as well.
The dividend yield here is solid at roughly 1.8% in 30 Day SEC terms, while the cost is ultra low at nine basis points a year. This fund has easily outperformed the most popular mid cap ETF, (MDY), while it has also beaten the S&P 500 YTD.
SPDR SP 400 Mid Cap Value ETF (NYSE:MDYV)
This ETF tracks the total return performance of the S&P Mid Cap 400 Value Index, before fees and expenses. The fund holds just under 300 stocks in its portfolio, with a weighted average market capitalization of $4.76 billion.
Financials dominate this fund, accounting for roughly 27.8% of the portfolio, followed by technology and industrials at about 13% each. The product is light in energy, staples, and telecoms, as these combine to make up less than 10% of assets.
This fund has a decent dividend yield of about 1.4% in 30 Day SEC terms while it has an expense ratio of 25 basis points a year. The product has outperformed the popular MDY in the YTD time frame, while it has also edged out the S&P 500 as well.
Vanguard SP Mid-Cap 400 ETF (NYSE:IVOO)
For those looking to go beyond value in the mid cap space, IVOO, a fund which tracks the S&P Mid Cap 400 Index, could be an interesting choice. This product holds roughly 400 stocks in its portfolio, while it spreads out assets extremely well across the top holdings.
In terms of sector exposure, again financials lead (23.1%), though industrials and technology both account for at least 15.6% as well. In terms of low sector allocations, telecoms again receive hardly any exposure, while staples and utilities also receive less than a 5% allocation too.
This fund has a 30 Day SEC yield of 1.2%, while its expense ratio is pretty cheap at 15 basis points a year. However, IVOO hasn’t performed as well as its value counterparts this year, but its performance is in line with the other benchmarks of MDY and SPY. Still, with its more balanced approach, this could be a solid choice for investors seeking to go beyond value to close out 2014 in this overlooked market segment.