The U.S. market was off to a great start this year and
continued to climb upward buoyed by an improving economy, solid
retail and jobs data, and growing investor confidence. Some
concerns about the Fed stimulus led to a brief pause in the rally
in the past two months, but it appears that the longer-term
bullish trend for stocks is still intact. While a broad play on
the equity markets can certainly give investors exposure to this
trend, a more targeted play could be warranted by looking at the
often overlooked mid cap ETF space.
are less popular than their small or large cap cousins which have
managed to establish a stronger asset base. Generally, investors
prefer to focus on large and small cap stocks - looking to large
companies for stability and smaller ones for growth-leaving mid
caps forgotten by many (read:
Forget SPY, Focus on Mid and Small Cap ETFs
This is unfortunate as mid cap ETFs can offer the best of both
worlds, allowing growth and stability in many portfolios. Though
these funds have recently been slightly under pressure, investors
could tap this current opportunity, as mid caps are safer and
could be better positioned if any political issues creep into the
Further, investors may want to consider cycling into mid caps
in order to obtain a nice momentum play as we move ahead in the
second half of the year. While looking at individual companies is
certainly an option, a focus on top ranked mid cap ETFs could be
a less risky way to tap into the same broad trends.
Top Ranked Mid Cap ETF in Focus
Wwe have found a number of ETFs that have the top Zacks ETF
Rank of 1 or 'Strong Buy' in the mid cap space and are thus
expected to outperform in the months to come. (read: all the
Below we present three funds that we believe to be the
best choices to tap into the space. This trio has enjoyed a
strong momentum over the past one-year time frame, and have
potentially superior weighting methodologies which could allow
this group to continue leading the mid cap space in the months
SPDR S&P 400 Mid Cap Growth ETF (
This underappreciated ETF offers exposure to the mid cap
growth sector of the U.S. equity market, by tracking the S&P
Mid Cap 400 Growth Index. Holding 225 stocks in its basket, the
fund puts just 14% of total assets in top 10 firms. This gives it
a nice balance across each security and prevents heavy
The top firm, Vertex Pharmaceuticals (
), make up for the largest 2.66% share while the rest does not
hold more than 1.55% of MDYG. In terms of sectors, information
technology and consumer discretionary take the top spot at
roughly one-fifth of the total each, followed by modest
allocations to financials, industrials and healthcare (read:
The Top Choice in the Tech ETF World?
The product is not very popular with $93.2 million in AUM and
is illiquid too, suggesting that bid ask spreads are relatively
wide and that total costs will come in much higher than the 25
bps expense ratio.
The ETF currently has a Zacks ETF Rank of 1 or 'Strong Buy'
with Low risk outlook, suggesting that it is positioned to
outperform similar competitors. Despite the recent slump, the ETF
has gained over 14% so far in the year and nearly 27% in the
trailing one-year time frame.
iShares S&P MidCap 400 Growth Index Fund (
For more a concentrated play on growth, investors could find
IJK, tracking the same index, an intriguing choice. The fund
holds about 225 companies in its basket, sees good volume, and
charges investors a fee of 25 bps a year.
Like its MDYG counterpart, the product is widely spread out
across each security and sector. The fund is by far is one of the
largest and most popular ETFs, having accumulated around $3.8
billion in its asset base.
The P/E and B/V ratio is quite high for the fund at just over
28 and 4, respectively, suggesting an incredible focus on growth.
This approach has largely paid off in terms of performance, as
IJK has gained about 14% so far in 2013 and nearly 27.8% over the
trailing one-year period.
This product also has a top Zacks ETF rank with Low risk
outlook, suggesting that it is poised to outperform in the long
run and especially over other choices in the space (read:
Zacks ETF Rank Guide
First Trust Mid Cap Value AlphaDEX Fund (
For a slightly more 'active' choice in the mid cap world,
investors should consider FNK for quality exposure. The fund is a
bit pricey, as it charges 70 basis points a year in fees, and has
a small volume of about 23,000 shares a day. It has managed
assets worth $17.9 million so far in the year.
The reason for this extra cost is the AlphaDEX methodology,
which seeks to taper the mid cap space to only the best
positioned companies. It ranks the stocks in the space by various
growth and value factors, eliminating the bottom ranked 25% of
As such, FNK should generate positive alpha relative to
traditional passive indices since it uses AlphaDEX methodology
and allots higher weights to more favorably ranked firms.
Still, roughly 165 stocks are in this fund's basket, with
financials and consumer discretionary taking the top two spots
Time for This Top Ranked Financial ETF?
). The product is well spread out across individual security as
it puts roughly 11% of its assets in the top 10 holdings. None of
the individual securities hold more than 1.2% share. Guess (
), Oil States International (
) and Exelis (
) occupy the top three positions in the basket.
The product has a top Zacks ETF Rank of 1 or 'Strong Buy' with
Medium risk outlook though, and appears poised to lead the market
higher. The fund has moved higher by over 17% YTD and 33.6% in
the trailing one-year time frame.
To sum up, we believe that the mid cap space has been a solid
performer when looking at both the year-to-date timeframe and
long-term perspective. Though small cap is leading at present,
mid caps are outpacing the large cap counterparts (see more ETFs
Given the solid history of outperformance, investors shouldn't
forget the mid cap space and should take a closer look at a few
of the top Ranked ETFs in this sector for excellent exposure that
could potentially provide investors with some more outperformance
in the coming months as well.
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FT-MC VALUE AD (FNK): ETF Research Reports
ISHARS-SP MC GR (IJK): ETF Research Reports
SPDR-SP4 MC GR (MDYG): ETF Research Reports
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