I am a value investor, meaning I look for stocks that the market hasn't discovered yet or that are out of favor for some reason. One of my favorite areas for value stocks is the mid-cap arena. Some of my best picks over the years have been those that started as small-caps and grew due to their success. It's these overlooked stocks whose stories I like that I spend most of my time on.
However, I can't spend all my time on them, and that's why I've been hunting down 3 mid-cap ETFs to share with aggressive investors, conservative investors, and the average investor.
Why own a mid-cap ETF? Other than the fact that mid-cap stocks have historically outperformed their larger brethren and offer the best chances of obtaining a multi-bagger return, you must have diversification in your portfolio. Sector outperformance occurs all the time, and the more diversification you have, the better.
If you don't have diversification, then you risk seeing your overall portfolio fall more in bad times by having your money overly concentrated.
Here are my choices for mid-cap value ETFs for the average Joe investor, aggressive investor and conservative investor.
For aggressive investors, have a look at the WisdomTree MidCap Earnings Fund (EZM). I like its very low expense ratio of 0.38%, which is more than covered by its 1.2% yield.
As quasi-actively managed model, it means there's a bit more risk involved than an ETF that seeks to mirror an index. It takes companies in the top 75% of the market capitalization of the WisdomTree Earnings Index, removes the top 500 largest companies, and is earnings-weighted in December of each year. Thus, companies with greater earnings generally have larger weight in the index. So it isn't just blindly cap-weighted.
The fund holds 612 stocks. The top 10 account for about 6% of the total asset base, and this speaks to its broad diversification.
The top holdings tend to rotate quite a bit. Right now, the top three are WABCO Holdings (WB), Santander Consumer USA Holdings (SC) and Brunswick Corp. (BC).
It has 25% of assets invested in financials, 19% in industrials, 17% in consumer discretionary, 13% in IT, 6% in utilities, 6% in materials, and 5% in energy.
This more aggressive approach is why it has significantly outperformed the S&P 500 since inception in February of 2007 - 79% to 37%. It's also why it carries a beta of 1.14 over 3 years, where 1.0 means it carries about the same risk as the S&P 500.
For the average Joe investor, I'm sticking with the same fund family in the form of the WisdomTree MidCap Dividend Fund (DON). The approach is somewhat similar to the previous fund but even less actively managed.
The fund holds the companies that compose the top 75% of the market capitalization of the WisdomTree Dividend Index after the 300 largest companies have been removed. The index is dividend-weighted annually to reflect what each company is expected to pay in the coming year.
The dividend yield isn't something investors will kill to own, but at 2.76%, it more than covers the 0.38% expense ratio.
The fund's assets are also nicely diversified with 396 stocks. The top 10 holdings are about 10% of the total asset base.
The top components also tend to rotate a good deal. The biggest holdings now are Maxim Integrated Products (MXIM), Mattel (MAT) and Ameren (AEE).
The fund has earned about the same return of the S&P 500 but with a beta of 0.95, meaning about 5% less risk.
If you're a conservative, then take a look at the PowerShares Russell Midcap Pure Value Portfolio (NYSE: PXMV). Be alert that up until May 22 the fund was known as the PowerShares Fundamental Pure Mid Cap Value Portfolio.
First of all, the fund removes the largest 70% of cumulative fundamental weight from a mid-cap value index. It then takes the remaining companies and screens them via fundamental analysis - including five-year average sales, cash flow, latest book value and five-year average dividend.
Then there's another step. The stocks are compared to the sector to see which ones are valued below their peers.
So this is a more actively managed fund, which I would generally characterize as carrying more risk. Yet the historic returns are such that when adjusted for risk, I feel it is a more conservative choice. It has 21% concentration in utilities, which adds to the conservative approach and also boosts the yield over 3%.
This ETF holds only 161 stocks, which is a bit more concentrated than I'd like, but is perfectly acceptable.
The top 10 holdings account for 11% of assets. The sector diversity is also nice, with 46% financials, 3% consumer, 6% industrial, 4% IT, 4% materials, and 11% energy.
As with any article regarding investments, you should never rely on information you read without doing your own due diligence. My articles contain my honest, forthright and carefully considered personal opinion, and conclusions, containing information derived from my own research. This may include discussions with management. I do not repeat "talking points" but may quote management from an interview. I am never influenced by third parties in arriving at my conclusions. Do not solely rely on my articles or anyone else's when making an investment decision. Always contact your financial advisor before investing in any security.
