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Mid-Cap ETFs to Profit From Earnings Growth Amid Trade Woes


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Amid escalating trade worries, the S&P 500 is back to the 2800 level while the Nasdaq Composite and Russell 2000 indexes set new record highs last week. The optimism came on the back of strong earnings growth and the perception that American stocks are largely insulated from potential trade wars.

Earnings for about 17% of the S&P 500 members that have reported Q2 earnings so far are up 20.9% from the same period last year on 10.3% higher revenues, with 86.2% of the companies beating EPS estimates and 77% surpassing revenue estimates. Investors should note that the proportion of positives surprises is tracking materially above historical periods. Overall, total earnings are expected to be up 21% on 8.3% higher revenues, with double-digit earnings growth for 11 of the 16 Zacks sectors (read: 5 Excellent ETF Plays as Q2 Earnings Cycle Begins ).

A slew of positive economic data, which indicate a healthier economy with a solid job market and desired inflation rates, have added to the strength.

However, the threat of full-blown trade war is looming large with Trump's intention to slap import tariffs on all $505 billion of Chinese goods. Both the United States and China levied taxes on $34 billion of each other goods, effective Jul 6. The Federal Reserve's Beige Book survey of businesses shows that the companies have started to feel the pressure of higher costs of raw materials thanks to tariffs on steel and lumber. As a result, the trade disputes could undermine economic growth, triggering a global recession.

Additionally, Trump in a tweet ramped up its antitrade policies on American trading partners, citing that the European Union and China are manipulating their currencies, and putting the United States at a disadvantage. He also criticized the Fed's rate increase policy saying that higher interest rates are reducing the effect of massive tax cuts intended to boost U.S. economic expansion in its ninth year and are making the United States less competitive.

Further, Trump warned Iran that any threats to the United States would be met with unspecified dire consequences. His tweet says "NEVER, EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE. WE ARE NO LONGER A COUNTRY THAT WILL STAND FOR YOUR DEMENTED WORDS OF VIOLENCE & DEATH. BE CAUTIOUS!" This marks the latest step amid escalating geopolitical tension.

In such a scenario, investors seeking to participate in a growing American economy and earnings, but worried about Trump's trade policies should consider mid-cap stocks in the basket form.

Why Mid Caps?

While large companies are normally known for stability and the smaller ones for growth, mid caps offer the best of both the worlds, allowing growth and stability in portfolios simultaneously. These middle-of-road securities are arguably safer and have the potential to move higher in turbulent times, especially if political issues or financial instability creeps into the picture.

Further, honing in on growth securities in this capitalization level allows investors to earn more returns. This is because growth stocks refer to those high-quality stocks that are likely to witness revenues and earnings increase at a faster rate than the industry average. These stocks harness their momentum in earnings to create a positive bias in the market, resulting in rocketing share prices (read: Trade Fear Oversold? Large-Cap Growth ETFs at 52-Week High ).

While there are several ETFs available in the space, we have highlighted five that have easily beaten the gain of 0.1% for the S&P 500 last week and have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting outperformance in the months ahead. These have potentially superior weighting methodologies that could allow these to lead the mid-cap space in the months ahead.

Additionally, these funds are popular and liquid enough, making compelling choices for investors seeking a nice momentum play with lower risk (see: all the Mid Cap ETFs here ):

First Trust Mid Cap Growth AlphaDEX Fund FNY

This ETF follows the NASDAQ AlphaDEX Mid Cap Growth Index, charging investors 70 bps ion an annual fees. It holds well-diversified 225 stocks, with none accounting for more than 0.82% of assets. Information technology takes the one-fourth of the portfolio in terms of sector exposure while healthcare, consumer discretionary, industrials and financials round off the next four spots with a double-digit allocation each. The fund has amassed $205.1 million and trades in average daily volume of 36,000 shares. It has gained 0.7% last week and has a Zacks ETF Rank #2.

iShares Morningstar Mid-Cap Growth ETF JKH

With AUM of $284.7 million, this product tracks the Morningstar Mid Growth Index and holds 199 mid cap securities, with none accounting for more than 1.5% of assets. Information technology takes the largest share at 29.6% while health care, industrials and consumer discretionary also receive double-digit exposure each. The ETF charges 30 bps in annual fees and trades in a volume of about 3,000 shares a day. It added 0.5% last week and has a Zacks ETF Rank #1.

Invesco Russell MidCap Pure Growth ETF PXMG

This fund tracks the Russell Midcap Pure Growth Index and holds 97 securities in its portfolio, with none accounting for more than 2.72% of assets. From a sector perspective, information technology occupies the top position at 45.4%, while consumer discretionary (20.4%), healthcare (15.9%) and industrials (11.4%) round off the next three spots. The fund has AUM of $249.4 million and average daily volume of about 39,000 shares. It charges 39 bps in annual fees and gained about 0.5% last week (read: These Sector ETFs Are Set to Sizzle on Earnings ).

SPDR S&P 400 Mid Cap Growth ETF MDYG

This ETF follows the S&P Mid Cap 400 Growth Index, holding 246 stocks in its basket. It is widely diversified across components, with each accounting for less than 1.4% share. Information technology is the top sector with 22.3% of assets, while consumer discretionary, financials, industrials, and healthcare also receive a double-digit exposure each. MDYG has about $1.2 billion in AUM and trades in volume of around 131,000 shares a day on average. It charges 15 bps in annual fees and was up 0.2% last week. The fund has a Zacks ETF Rank #2.

Vanguard S&P Mid-Cap 400 Growth ETF IVOG

This ETF tracks the S&P MidCap 400 Pure Growth Index, charging investors 20 bps in fees per year. It has amassed $844.5 million in its asset base while sees a volume of about 58,000 shares. The fund holds 247 stocks with a well-diversified portfolio as each firm holds no more than 1.4% of total assets. It is also skewed toward information technology, with 21.9% share while consumer discretionary, financials, industrials, and healthcare round of the top five. The ETF has added 0.2% last week and has a Zacks ETF Rank #2.

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SPDR-SP4 MC GR (MDYG): ETF Research Reports

ISHARS-MO MC GR (JKH): ETF Research Reports

VANGD-SP4 GRWTH (IVOG): ETF Research Reports

PWRSH-F P MD GR (PXMG): ETF Research Reports

FT-MC GROWTH AD (FNY): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Earnings , ETFs
Referenced Symbols: MDYG , JKH , IVOG , PXMG , FNY



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