These Mid-Cap ETFs Could Shine in 2023

The most frequently used descriptor of mid-cap stocks is “overlooked.” While accurate, things shouldn’t be this way.

History confirms that over long holding periods, mid-cap stocks outperform large- and small-cap equities while displaying better volatility traits than the latter. That’s happening again this year as the S&P MidCap 400 Index is outpacing both the large-cap S&P 500 and the S&P SmallCap 600 Index. Yet even with all that favorable sentiment, it is indeed accurate to describe mid-caps as overlooked.

With the relative of obscurity of mid-caps in mind and with 2023 fast-approaching, market participants should remember that investing isn’t a popularity contest. It’s about generating returns. Over the long haul, mid-caps have accomplished that objective without fanfare comparable to larger and smaller equities. Plus, mid-cap stocks are currently offering investors attractive valuations – something that isn’t true across the large-cap landscape.

With those factors in mind, the following mid-cap ETFs could be worth considering in 2023.

WisdomTree U.S. MidCap Dividend Fund (DON)

Since inception in 2006, the WisdomTree U.S. MidCap Dividend Fund (DON) has been one of the best-performing mid-cap funds of any stripe, active or passive. It also addresses a combination that many investors don’t think of: mid-cap stocks and dividends.

DON’s near-term relevance is enhanced by its value tilt and how it sources reliable payout growth. This mid-cap ETF accomplishes that goal by focusing crucial metrics such as return on assets (ROA) and return on equity (ROE) as well as quality and dividend yield.

“We believe that it looks attractive in today’s market, with valuations comfortably below long-term averages and discounts among the lowest observed since inception," according to WisdomTree research. "It also may offer an attractive entry point for investors looking to establish or maintain mid-cap value exposure amid a tenuous period for the U.S. economy."

IQ Candriam ESG U.S. Mid Cap Equity ETF (IQSM)

After debuting in October, the IQ Candriam ESG U.S. Mid Cap Equity ETF (IQSM) is one of the newest kids on the mid-cap ETF block and like the aforementioned DON, this mid-cap ETF addresses a combination many investors don’t usually think of: mid-caps and environmental, social and governance (ESG) virtues.

IQSM’s ESG overlay shouldn’t scare value investors away because this mid-cap ETF offers credible amounts of value and this fund could be poised to be a 2023 leader as investors continue looking for equity opportunities beyond large-cap growth.

“However, beneath the surface the picture is very different," according to Schroders research. "This is because a change in market leadership is underway which we think will continue into 2023, and potentially longer. Although large caps outperformed strongly in January 2022, since then small and mid caps have been steadily outperforming."

Invesco S&P MidCap 400 Equal Weight ETF (EWMC)

The Invesco S&P MidCap 400 Equal Weight ETF (EWMC) is the equal-weight answer to the aforementioned S&P MidCap 400 Index, which is a cap-weighted benchmark. Equal weighting, regardless of market capitalization spectrum, offers investors more diversification and reduced concentration risk.

“This strategy tends to hold smaller, more undervalued companies compared with its average peer in the Mid-Cap Blend Morningstar Category," according to Morningstar. "Looking at additional factor exposure, this strategy has exhibited a tilt toward high-volatility stocks, or the shares of companies with histories of higher standard deviation of returns. Such exposure tends to pay off when markets are hot and to be costly when they are not."

This mid-cap ETF is beating cap-weighted rivals tracking the S&P MidCap 400 by 160 basis points year-to-date.

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

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