But, hype aside, midcap ETFs have outperformed large- and
small-cap ETFs over the past year. I'm basing that on looking at
the SPDR S&P 500 ETF (NYSEArca:SPY) as a proxy for large-caps
and the iShares Russell 2000 Index Fund (NYSEArca:IWM) for
Two leading midcap ETFs-the iShares S&P 400 MidCap
(NYSEArca:IJH) and the SPDR S&P MidCap 400 (NYSEArca:MDY)-have
one-year total returns of 29.6 and 29.5 percent, respectively. That
easily beats SPY's 21.8 percent and even IWM's 26.2 percent.
Moreover, the midcap ETFs achieved these returns with risk,
measured by standard deviation, only slightly greater than that of
Today's not the day to delve into why midcaps rather than
small-caps have been leading the broad recovery in equities in the
past year, but the numbers don't lie.
So, how do the biggest cap-weighted midcap funds differ?
In general, stock selection for these funds is determined by the
large-cap bucket above it. The iShares Russell Midcap
(NYSEArca:IWR) follows the bottom 800 stocks in the Russell 1000.
The Vanguard Mid-Cap ETF (NYSEArca:VO) follows the MSCI U.S. Mid
Cap 450 Index. This benchmark selects stocks ranked 301 to 750 by
market cap. IJH and MDY meanwhile follow the S&P 400 Mid-Cap
index, which picks stocks by committee.
These selection differences drive performance for these four
Year-to-date total returns fall within a 40 basis point range.
And, each of the funds' one-year performances ranges within 90
basis points. VO turns in the top performance in each case-8.1
percent so far this year and almost 30 percent in the past
VO leads in another important category:direct cost. VO's annual
expense ratio of 0.12 percent expense ratio ranks lowest of the
four. That's less than half of MDY's 0.25 percent. (Bargain hunters
take note:Two newer funds not fully discussed here also offer
expense ratios in VO's range:the Focus Morningstar Mid Cap
(NYSEArca:FMM) matches VO's 0.12 percent and the Schwab U.S.
Mid-Cap (NYSEArca:SCHM) comes in at 0.13 percent.)
If you don't have views on a particular sweet spot for the size
bucket, strong performance and low cost make a reasonably good case
for picking VO. However, two caveats apply.
First, VO's daily trading volume, while robust, lags that of the
other three. MDY trades roughly 10 times as many shares as VO daily
and with tighter spreads. Using a limit order instead of a market
order can help manage this difference. Second, Vanguard doesn't
post daily holdings. So, if daily transparency is paramount to you,
VO isn't the right call.
That said, these caveats should matter less to a buy-and-hold
investor looking to take advantage of the outsized performance of
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