2 ETFs To Add U.S. Mid-Cap Stock Diversity To Any Portfolio

2 ETFs To Add U.S. Mid-Cap Stock Diversity To Any


Long-term equity portfolios typically diversify across sectors and regions, as well as market capitalization (cap). Understanding the characteristics of these categories is important as they have different risk/return profiles and could behave differently depending on market conditions.

We previously discussed an exchange traded fund (ETF) that tracks stocks. Today, we’ll focus on mid-caps and take a closer look at two funds.

The Case For Mid-Caps

In the US, mid-cap stocks are typically considered to be those firms with a market cap between $2 billion and $10 billion. However, differences in definition may exist among brokers. Similarly, some ETFs that describe themselves as “mid-cap” could include companies whose market-cap is larger than $10 billion. Historically, ceilings for each cap category have gone up.

Market value affects expectations about a company’s future. Mid-cap stocks have grown large enough to graduate from the small-cap realm. Thus their operations are more established and possibly less risky. However, if the economic contraction continues longer than expected, mid-caps may have a harder time weathering the storm than large-caps.

Nonetheless, they are still small and possibly flexible enough to continue growing into a larger cap business. For instance, a company with a market valuation of $7 billion is likely to double in value more quickly than a company with a market cap of $70 billion.

The “mergers and acquisitions” (M&A) theme tends to be significant for mid-cap companies. Management could decide to buy a smaller company or merge with a comparable or even larger business. Such an approach might become both a blessing and a curse for a mid-cap company and its investors. Significantly, large-caps tend to acquire mid-caps, a move that usually creates value for shareholders.

Academic research and most financial planners tend to agree, a diversified portfolio that includes companies with various market caps could help reduce risk and volatility. As such, investment returns are likely to be higher over the long haul.

Mid-cap companies in general do not have as much analyst coverage as large businesses. This leaves room for quite a number of them to stay below the radar. Investors willing to put time into research are likely to find mid-cap firms with a promising future.

Alternatively, they may do due diligence on a range of funds that specialize in mid-cap stocks. Here are two that may be of interest:

1. SPDR S&P MIDCAP 400 ETF

  • Current Price: $$366.13
  • 52 Week Range: $214.22-$384.47
  • Dividend Yield: 1.67%
  • Expense Ratio: 0.23%

The SPDR S&P MIDCAP 400 ETF (NYSE:) provides exposure to 400 mid-cap companies.

MDY tracks the . The top ten holdings constitute around 7% of net assets, which stand at around $15.5 billion. No single company has more than 0.8% weighting. Put another way, company-specific risks have mostly been diversified away.

Heading the list of current holdings: SolarEdge Technologies (NASDAQ:), Enphase Energy (NASDAQ:), Monolithic Power Systems (NASDAQ:), Generac Holdlings (NYSE:) and Trimble (NASDAQ:).

In terms of sector allocation, Industrial companies (17.89%) top the list, followed by Information Technology (16.07%), Consumer Discretionary (14.92%), Financials (14.03%), Health Care (11.36%), Real Estate (9.35%), Materials (5.89%), Consumer Staples (3.93%), Utilities (3.73%), Communication Services (1.68%), and Energy (1.16%).

Since the start of the year, the fund is down about 3%. In comparison, the SPDR S&P 500 ETF (NYSE:), which tracks the index is up close to 8%. Put another way, S&P mid-caps have been lagging . MDY’s trailing P/E and P/B ratios are 21.42 and 1.87, respectively. Investors who expect mid-caps to ultimately catch-up with large-cap shares may consider buying the dips.

2. Vanguard Mid-Cap ETF

  • Current Price: $187.03
  • 52 Week Range: $110.05 – $187.54
  • Dividend Yield: 1.63%
  • Expense Ratio: 0.04%

The Vanguard Mid-Cap Index Fund ETF (NYSE:) also provides exposure to a range of mid-cap U.S.-based firms.

VO Weekly

VO, which has 360 holdings, tracks the . The top ten holdings make up close to 8% of net assets, which stand at $116 billion.

Lululemon Athletica (NASDAQ:), Digital Realty Trust (NYSE:), DexCom (NASDAQ:), DocuSign (NASDAQ:), and Veeva Systems (NYSE:) top the fund. Investors may notice that each of these companies have capitalizations well over $10 billion.

The top sector allocation (by weighting) is Technology (21.10%). Next in line are Financials (20.30%), Industrials (15.70%), Consumer Services (11.50%), Health Care (9.70%), and are Consumer Goods (9.60%).

Year-to-date, the fund is up about 5% and hit an all-time high on Oct. 12. Valuation—as would be indicated by the trailing P/E (25.9) and P/B (2.9) ratios—remains elevated. The current earnings season may bring short-term profit-taking in a large number of stocks, which could put pressure on the fund.

A drop toward $175 would improve the margin of safety for long-term portfolios.



Source link

Investing.com


Leave a Reply

Your email address will not be published. Required fields are marked *


About us

InvestLab is a financial services technology company focused on the global trading market. Founded in 2010 in Hong Kong, the company develops trading, market data, and social research products that enable individual investors and small to mid-size brokers to access global markets. We provide brokers and financial institutions cross border capabilities for retail investors into 43 markets globally.


CONTACT US

CALL US ANYTIME