Mid-sized US companies remain a useful tool for investing by
company size. Ignored by cyclical traders, mid cap seems less
volatile than small cap and less bid-up than large cap. But for
most investors its job is to add diversification to a large cap
portfolio.
This year mid cap outpaced large cap in dramatic fashion as
well:
The simplest way to assess mid cap's prospects is by gauging
its sector exposure relative to other asset classes. High
exposure in August 2010 to industrial materials and utilities,
and low exposure to telecom and consumer goods are what is most
notable here. As might be expected, mid cap often has sector
exposures in between small and large cap. We see no glaring
weakness here:
Mid cap enthusiasts note that mid cap companies are good
candidates for acquisition by larger ones, and when this happens
shareholder receive a tidy premium. 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.
Size definitions of mid cap companies by
ETFs
varies. Major plain-vanilla, low-cost mid cap ETFs with their
size range of holdings include:
- 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
- SPDR MidCap ETF (
MDY
): stocks ranked 501-900
Fees range from Vanguard's tight-fisted .13% per year to as
much as .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
- Rydex ExpressShares 2x S&P MidCap 400 ETF(AMEX:RMM):
0.7% 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
Co-founder of indexfunds.com, author of two books on
investing, and founder of ETFzone.com, Will has been writing on
indexing issues for 8 years. He holds an MBA from the
University of Texas at Austin.