Mid-Cap Value ETFs: Value With Stability

by: MyPlanIQ

Mid-size company stocks have better growth potential than large-cap stocks and lower risk when compared with small-cap ETFs. Thus, mid-cap value ETFs offers value with better stability. Mid-cap ETFs are favorite investment vehicles for investors who do not want to actively seeking style change in portfolio asset allocation.

Mid-cap ETFs have performed reasonably well. In fact, before the rally between the end of June and beginning of July, as a style asset class, it was one of the best performing styles ... though as of July 6, it is ranked in the middle of the pack.
For information on more ETF performance in different class of assets, please refer here.

The following simple criteria can be used to determine mid-cap value stocks:

  • Market cap between $1 billion and $10 billion.
  • A debt to equity ratio of less than 0.5.
  • Free cash flow of at least $100 million.
  • Projected five-year earnings growth rate of at least 15%.
  • A forward P/E of less than 15.

Let's compare three ETFs that have reasonable liquidity. The following table shows their performance as of July 1:

Description Symbol 1 Yr 3 Yr 5 Yr Avg. Volume(K) 1 Yr Sharpe
iShares S&P MidCap 400 Value I IJJ 36.44% 7.66% 4.56% 218 257.4%
iShares Russell Midcap Value I IWS 38.5% 7.88% 4.51% 729 287.86%
Vanguard Mid-Cap Value ETF VOE 35.0% 8.27% NA 70 259.26%

IWS is the best performer with a return of 4.56% in three years; the average volume is also good as compared to the other ETFs in the table. In terms of one-year, IWS is still the best performer with a return of 38.5%; the runner-up is IJJ with a return of 36.44%.

For information on more ETF performance, please refer here.

IWS is the star performer with good returns and volumes. IWS Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the mid-capitalization value sector of the U.S. equity market as represented by the Russell Midcap Value Index. The index represents approximately 60% of the total market capitalization of the Russell Midcap Index. The total net assets of the fund are $3.2 billion. The total returns since inception of the fund is 8.64% and the after tax returns are 8.17% to date. The expense ratio of the fund is 0.25%.

The following shows the top 10 holdings of IWS, as of July 1.

Company Symbol % Assets
CenturyLink, Inc. Common Stock CTL 1.13
FirstEnergy Corporation Common FE 0.83
Spectra Energy Corp Common Stoc SE 0.80
Spectra Energy Corp Common Stoc SE 0.79
CBS Corporation Class B Common CBS 0.74
Lorillard, Inc Common Stock LO 0.74
Peabody Energy Corporation Comm BTU 0.73
Equity Residential Common Share EQR 0.73
Noble Energy Inc. Common Stock NBL 0.72
PP&L Corporation Common Stock PPL 0.72

On the other hand, Vanguard mid-cap ETF VOE had the best three-year return, beating the other two ETFs (IWS, IJJ) with meaningful margins (0.4-0.6%). It is again an ETF that should be monitored more closely.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.