Mid-sized US companies are easily forgotten. Large cap indexes
such as the S&P 500 are by far the most visible, and small
stocks most often turn up on big winners or losers lists. Stuck
in the middle are mid caps and the
ETFs
which follow them.
Several elements are in mid caps' favor instead of small cap
as a tool to round out core holdings of large companies. Firms of
medium size have better liquidity than small firms, in part due
to trading volume and in part because a greater percentage of
outstanding stock is available to the public. These features help
moderate volatility and lower transaction costs. Also, expense
ratios are less than small cap ETFs which must trade numerous
thinly traded companies and/or deploy sampling techniques.
Finally, a quirk of index construction plays in mid cap's favor:
the largest mid cap companies often get a speculative boost just
before they are promoted to large cap index, once again to the
benefit of shareholders.
The main problem with mid-cap is its relevance in portfolio
construction. If investors want to add "smallness" to a
portfolio, they can get more of it from small cap ETFs. Mid cap
tracks in-between large and small cap. The past three years
demonstrate almost perfectly what one should expect to get out of
each size ETF over the long-term:
Small and mid cap are more volatile, so they dropped hard in
the crash, but they rebounded faster than large cap and over time
outstripped it. These long-term trends are rarely so neat in such
a small period, of course.
Investors are paying more for mid-sized companies with P/Es of
around 17 compared to about 14-15 for large cap, which is to be
expected.
Exposure to various industrial sectors in recent years has
played a dominant role, but we expect this effect to dampen.
Financials are now far less volatile than three years ago, and
now basic materials and energy (essentially commodities) are
showing more moderate price movements. For this part of the cycle
we like their exposure overall. Mid-cap has a little more
exposure to industries traditionally strong in a recovery like
consumer cyclicals and real estate, low exposure to financials
which remain risky in our view, and mixed exposure to commodities
(more with basic materials and less with energy). An average
among ETFs is approximated here:
|
|
Mid Cap |
Large Cap |
| Consumer Cyclical |
14% |
9% |
| Real Estate |
6% |
2% |
| Financials |
11% |
14% |
| Basic Materials |
7% |
3% |
| Energy |
9% |
13% |
Size definitions of mid cap companies by ETFs varies. Major
plain-vanilla, low-cost mid cap ETFs with their size range of
holdings include:
- SPDR MidCap ETF (
MDY
): stocks ranked 501-900
- Vanguard Mid-Cap ETF (
VO
): stocks ranked 301-750
- iShares S&P MidCap 400 (NYSEArca:IJH) stocks ranked
501-900
- iShares Russell Midcap ETF (NYSEArca:IWR): stocks ranked
200-800
- SPDR Dow Jones Wilshire Mid Cap ETF (
EMM
): stocks ranked 501-1000
Fees range from Vanguard's tight-fisted 0.13% per year to as
much as 0.25%, but all are reasonable. There is little expense
drag to passive size investing in ETFs.
Where does mid cap start and end? Definitions vary by
provider. For many investors the S&P 500 is synonymous with
large cap, while the next 500 or so smaller stocks are mid cap
and the next 2000 or so are small cap. Knowing how much to buy is
crucial for over- or underweighting. In this case the first 500
stocks represent about 75% of the US stock market, the next 500
represent about a bit less than 15% and the next 2000 represent
less than 10%. A size-neutral portfolio will allocate in these
proportions.
Precise numbers for how much to invest in particular ETFs to
remain neutral depends on each provider's definition of size
boundaries. Allocations can be calculated by summing market
capitalization and weightings of holdings of a provider's small,
mid and large cap funds vs. the aggregate. Style investing takes
a bit of work.
For investors seeking liquidity, IJH and EMM are good
candidates. They themselves are quite liquid and complement
S&P 500 ETFs which have tight bid-ask spreads due to their
enormous trading volume, competitive fees and ample study by Wall
St. analysts. They also are easy to follow in the news.
Note that EMM does not complement its sister products SPDR Dow
Jones Wilshire Mid Cap ETF (
ELR
) and SPDR Dow Jones Wilshire Mid Cap ETF (
ELR
). ELR contains stocks ranked 1-750 by size and is complemented
by small cap ELR which handles stocks ranked 751-2500. Using EMM
with them causes double exposure on mid cap stocks. EMM's true
purpose is to complement S&P 500 ETFs such as SPY, which is
useful for many investors.
In addition to these four plain-vanilla size-based ETFs, there
are numerous mid cap ETFs also targeting growth or value:
- iShares Morningstar Mid Core ETF(NYSEArca:JKG): 0.25%
annual fee
- iShares Morningstar Mid Growth ETF(NYSEArca:JKH): 0.3%
annual fees
- iShares Morningstar Mid Value ETF(NYSEArca:JKI): 0.3%
annual fees
- iShares Russell Midcap Growth ETF(NYSEArca:IWP): 0.25%
annual fees
- iShares Russell Midcap Value ETF(NYSEArca:IWS): 0.25%
annual fees
- iShares S&P MidCap 400 Growth ETF(NYSEArca:IJK):
0.25% annual fees
- iShares S&P MidCap 400 Value ETF(NYSEArca:IJJ): 0.25%
annual fees
- Rydex ExpressShares S&P MidCap 400 Pure Growth ETF(
RFG
): 0.35% annual fees
- Rydex ExpressShares S&P MidCap 400 Pure Value
ETF(RFV): 0.35% annual fees
- Vanguard Mid-Cap Growth ETF(VOT): 0.13% annual fees
- Vanguard Mid-Cap Value ETF(VOE): 0.13% annual fees
- SPDR Dow Jones Wilshire Mid Cap Growth ETF(AMEX:EMG):
0.25% annual fees
- SPDR Dow Jones Wilshire Mid Cap Value ETF(AMEX:EMV):
0.25% annual fees
For traders there are a handful of leveraged funds. They
typically deliver two times the daily return of an index (or the
inverse for the short funds), less costs of rolling over monthly
futures. These deliver a bit more leverage than borrowing on
margin from a broker, they cost less per unit of leverage, and
losses are limited to your investment in the ETF (no late-night
margin calls). A good deal all-in-all but strictly for
traders.
- ProShares Ultra Russell MidCap Growth ETF(UKW): 0.95%
annual fees
- ProShares Ultra Russell MidCap Value ETF(UVU): 0.95%
annual fees
- ProShares UltraShort Russell MidCap Growth ETF(SDK):
0.95% annual fees
- ProShares UltraShort Russell MidCap Value ETF(SJL): 0.95%
annual fees
Unlike large and small cap categories, however, only a few
ETFs use fundamental financial ratios to beat popular indexes.
These are high quality and at reasonable prices:
- RevenueShares Mid Cap ETF(NYSEArca:RWK): 0.54% annual
fees
- WisdomTree MidCap Dividend ETF(NYSEArca:DON): 0.38%
annual fees
- WisdomTree MidCap Earnings ETF(EZM): 0.38% annual
fees