IJH: The Second ETF You Should Buy

| About: iShares Core (IJH)

Summary

I recently reviewed the Seeking Alpha ETF Investing Guide and decided to implement it for a portion of my portfolio.

This article reviews iShares Core S&P MidCap ETF, the second ETF in the core portfolio of Seeking Alpha’s ETF Investing Guide.

IJH is a good ETF for the mid-cap portion of most investor’s Core ETF portfolio, both the Vanguard Mid-Cap ETF and the Schwab U.S. Mid-Cap ETF are also good options.

The Seeking Alpha ETF Investing Guide

I recently reviewed the Seeking Alpha Investing Guide and decided to allocate part of my portfolio to a core portfolio of ETFs, similar to that suggested by the guide. I do not intend to completely switch course from my current allocation but to set up a separate core portfolio of ETFs and to allocate a majority of my investments to this Core ETF portfolio over time.

After reviewing the investing guide, I drafted a procedure for implementing the suggestions of the guide. Currently I am reviewing each of the suggested ETFs to determine which to buy. This article focuses on the U.S. mid-cap portion of the Core ETF portfolio and the iShares Core S&P Mid Cap ETF (NYSEARCA:IJH).

iShares Core S&P Mid Cap ETF - Investment Synopsis

The iShares Core S&P Mid Cap ETF seeks to track the investment results of the S&P Mid Cap 400 index, composed of mid-cap U.S. equities. IJH includes stocks with market capitalization of $2 billion to $10 billion. Mid-cap stocks are often overlooked as they make up only about 4% of the total U.S. stock market. Historically mid-cap stocks have outperformed both small-cap and large-cap stocks (see chart below). IJH provides low cost exposure to mid-sized U.S. companies and can be used in the core of your portfolio to seek long-term growth.

Performance of IJH compared to the S&P 500 and small cap stocks since 2000

Click to enlarge

Source: Yahoo Finance (1/30/2016)

As the chart above shows, since 2000, IJH (the blue line, up 177%) has outperformed both small cap (represented by the iShares Russell 2000 ETF (IWM), the green line, up 115%) and large cap (represented by the S&P 500, the red line, up 33%). During these 15 plus years, there have been periods where IJH has outperformed and underperformed and recently IJH has underperformed the S&P 500. When setting up a Core ETF portfolio and making an initial allocation, an investor may want to consider both the relative historical performance and the expected future performance of U.S. mid-cap companies versus the other sectors covered in the Core ETF portfolio.

Equity characteristics of IJH vs large-cap and small-cap ETFs

iShares Core S&P Mid-Cap ETF

iShares Core S&P 500 ETF (NYSEARCA:IVV)

iShares Core S&P Small-Cap ETF

Price/Earnings Ratio

19.80

18.84

19.72

Price/Book Ratio

2.20

2.76

1.91

Click to enlarge

Source: iShares by BlackRock (as of 12/31/2015)

The price/earnings ratio for IJH is slightly higher than both that of iShares S&P 500 ETF and iShares Small-Cap ETF. The price/book ratio for IJH is higher than iShares Small-Cap ETF but lower than that of iShares S&P 500 ETF. All of these ratios will have fallen somewhat since they were calculated on 12/31/2015.

Top 10 holdings

Source: iShares by BlackRock (as of 1/28/2016)

IJH's top ten holdings make up approximately 6.7% of total holdings. Because the S&P Mid Cap 400 uses a market-cap weighting structure, the larger companies have a larger weighting, but this is not nearly as pronounced for the Mid Cap ETF, as the weighting for the top 10 holdings in the S&P 500, which make up approximately 19% of total holdings.

Equity sector diversification

Source: iShares by BlackRock (as of 1/28/2016)

IJH's largest stock holdings are in the financial sector. Investors setting up a core portfolio of ETFs will probably want to reduce their holdings of individual stocks, particularly in sectors where both the ETF and the investor are heavily invested.

ETFs in the U.S. mid-cap category

Symbol

Fund Name

AUM ($MM)

Expense Ratio

IJH

iShares Core S&P MidCap ETF

24,714M

0.12%

MDY

SPDR S&P MidCap 400 ETF

13,536M

0.25%

VO

Vanguard Mid Cap ETF

11,973M

0.09%

IWR

iShares Russell Mid-Cap ETF

11,564M

0.20%

SCHM

Schwab U.S. Mid-Cap ETF

1,856M

0.07%

FNX

First Trust Mid Cap Core AlphaDEX ETF

684M

0.62%

EZM

WisdomTree MidCap Earnings ETF

611M

0.38%

JKG

iShares Morningstar Mid-Cap ETF

481M

0.25%

IVOO

Vanguard S&P Mid-Cap 400 ETF

354M

0.15%

RWK

RevenueShares Mid Cap ETF

198M

0.54%

Click to enlarge

Source: Seeking Alpha (as of 1/30/2016)

Above is a list of the top 10 mid-cap ETFs, listed by assets under management (AUM). As the table shows, IJH is the largest U.S. mid-cap ETF by AUM. For those that want to do further research, additional detail on these ETFs is available on Seeking Alpha's ETF Hub.

Expenses and dividend yield

IJH's expense ratio is 0.12%, this is well below the average expense ratio of similar funds. Of the top ten U.S. mid-cap stock ETFs listed above, only the Vanguard Mid-Cap ETF and the Schwab U.S. Mid-Cap ETF have lower expense ratios.

VO tracks the performance of the CRSP U.S. Mid Cap Index, a broadly diversified index of stocks of mid-size U.S. companies. The CRSP U.S. Mid Cap Index targets inclusion of the U.S. companies that fall between the top 70%-85% of investable market capitalization and on December 31, 2015, the companies ranged in market cap from $1.0 billion to 22.0 billion. SCHM tracks the Dow Jones U.S. Mid-Cap Total Stock Market Index which includes the companies ranked 501-1000 by market capitalization. Either of these ETFs could be used to rotate the mid-cap portion of your portfolio into, when tax loss selling.

Given the relatively high price of the global equity markets today and particularly the U.S. markets, it is likely that future returns may be lower than those recently experienced. In this environment, it is important that the core of your portfolio is allocated to funds with low expense ratios.

IJH's 30 day SEC yield was 1.57%, as of December 31, 2015.

Conclusion

I believe IJH is a good ETF for the mid-cap portion of an investor's Core ETF portfolio. I believe both Vanguard Mid-Cap ETF and Schwab U.S. Mid-Cap ETF are also good choices and may be used to rotate into for the mid-cap portion of an investor's core portfolio, when tax loss selling. Although the U.S. mid-cap market has recently sold off, I do not believe it is cheap versus either historical valuations or foreign stocks. Dollar cost averaging a new investment into IJH is probably a good idea. After reviewing the other ETFs in the core ETF portfolio, I expect to allocate a portion of my portfolio, currently allocated to individual stocks, to either IJH, VO or SCHM.

Addendum

Seeking Alpha's Investment Guide Core ETF Portfolio

ETF Ticker

Fund Name

Fund Description

Expense Ratio

VOO

Vanguard S&P 500 ETF

Large cap U.S. stocks

0.05%

IJH

iShares Core S&P Mid Cap ETF

Mid cap U.S. stocks

0.12%

VTWO

Vanguard Russell 2000 ETF

Small cap U.S. stocks

0.15%

IEFA

iShares Core MSCI EAFE ETF

Multi cap foreign developed market stocks

0.12%

IEMG

iShares Core MSCI Emerging Markets ETF

Multi cap emerging market stocks

0.18%

LQD

iShares iBoxx $ Investment Grade Corporate Bond ETF

U.S. investment grade corporate bonds

0.15%

PLW

PowerShares 1-30 Laddered Treasury Portfolio ETF

U.S. Treasuries

0.25%

SCHP

Schwab U.S. TIPS ETF

U.S. TIPS

0.07%

VNQ

Vanguard REIT Index ETF

U.S. REITs

0.10%

DBC

PowerShares DB Commodity Index Tracking ETF

Broad commodities

0.85%

Click to enlarge

Simply Investing - Philosophy

Establishing a core portfolio in well-diversified, low expense ETFs, held for the long term, is a good idea for most all investors. The core of a small portfolio can start off as simple as one well diversified global ETF with a low expense ratio, like the Vanguard Total World Stock ETF (NYSEARCA:VT). Typically, as the portfolio grows, the core of the portfolio would include exposure to the ten asset classes listed above.

There are four steps needed to set up an efficient investment plan. The decisions and actions required to set up the plan and purchase the ETFs can be done in about 4 hours (see the further reading section below for more details):

  1. Decide on an asset allocation plan among the ETFs in the core portfolio.
  2. Open an online brokerage account with a linked online bank account.
  3. Determine if you will invest all your investment funds at once or over a period of time.
  4. Determine which investments to buy in your taxable and tax deferred accounts.

The core ETF portfolio outlined above, after tax, should significantly outperform either individual stock picking or a portfolio managed by a financial advisor. Over the typical investors time horizon of 40+ years the expected advantage of this core ETF portfolio is staggering.

Investors that enjoy the investment analysis process and are willing to spend the time to analyze and invest in individual stocks or sectors can still do this. I believe, the majority of these investors should still set up a core ETF portfolio, but can allocate a small, fixed percentage of their portfolio to "edge" positions, which offer additional risk and opportunity.

Further reading

ETF Investing Guide - Written by Seeking Alpha's Founder in 2006 is a great guide for setting up a portfolio of ETFs.

Set Up A Core ETF Portfolio Now - Describes the four steps required to implement the suggestions in the ETF Investing Guide. The ETF Investing Guide is made up of 54 articles and takes some time to read and assimilate the information. This article condenses the information from the guide down to four steps that can be completed to set up a core ETF portfolio in around four hours.

VOO the first ETF in the core ETF portfolio is reviewed here, The First ETF You Should Buy.

This article reviewed IJH the second ETF in the core ETF portfolio.

Future articles will review the rest of the ETFs in the core ETF portfolio.

Disclosure: I am/we are long VT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.