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The U.S. market was off to a great start this year and continued to climb upward buoyed by an improving economy, solid retail and jobs data, and growing investor confidence. Some concerns about the Fed stimulus led to a brief pause in the rally in the past two months, but it appears that the longer-term bullish trend for stocks is still intact. While a broad play on the equity markets can certainly give investors exposure to this trend, a more targeted play could be warranted by looking at the often overlooked mid cap ETF space.
Mid cap ETFs are less popular than their small or large cap cousins which have managed to establish a stronger asset base. Generally, investors prefer to focus on large and small cap stocks — looking to large companies for stability and smaller ones for growth—leaving mid caps forgotten by many (read: Forget SPY, Focus on Mid and Small Cap ETFs).
This is unfortunate as mid cap ETFs can offer the best of both worlds, allowing growth and stability in many portfolios. Though these funds have recently been slightly under pressure, investors could tap this current opportunity, as mid caps are safer and could be better positioned if any political issues creep into the picture.
Further, investors may want to consider cycling into mid caps in order to obtain a nice momentum play as we move ahead in the second half of the year. While looking at individual companies is certainly an option, a focus on top ranked mid cap ETFs could be a less risky way to tap into the same broad trends.
Top Ranked Mid Cap ETF in Focus
Wwe have found a number of ETFs that have the top Zacks ETF Rank of 1 or ‘Strong Buy’ in the mid cap space and are thus expected to outperform in the months to come. (read: all the Top Ranked ETFs).
Below we present three funds that we believe to be the best choices to tap into the space. This trio has enjoyed a strong momentum over the past one-year time frame, and have potentially superior weighting methodologies which could allow this group to continue leading the mid cap space in the months ahead.
SPDR S&P 400 Mid Cap Growth ETF (MDYG - ETF report)
This underappreciated ETF offers exposure to the mid cap growth sector of the U.S. equity market, by tracking the S&P Mid Cap 400 Growth Index. Holding 225 stocks in its basket, the fund puts just 14% of total assets in top 10 firms. This gives it a nice balance across each security and prevents heavy concentration.
The top firm, Vertex Pharmaceuticals (VRTX), make up for the largest 2.66% share while the rest does not hold more than 1.55% of MDYG. In terms of sectors, information technology and consumer discretionary take the top spot at roughly one-fifth of the total each, followed by modest allocations to financials, industrials and healthcare (read: The Top Choice in the Tech ETF World?).
The product is not very popular with $93.2 million in AUM and is illiquid too, suggesting that bid ask spreads are relatively wide and that total costs will come in much higher than the 25 bps expense ratio.
The ETF currently has a Zacks ETF Rank of 1 or ‘Strong Buy’ with Low risk outlook, suggesting that it is positioned to outperform similar competitors. Despite the recent slump, the ETF has gained over 14% so far in the year and nearly 27% in the trailing one-year time frame.
iShares S&P MidCap 400 Growth Index Fund (IJK - ETF report)
For more a concentrated play on growth, investors could find IJK, tracking the same index, an intriguing choice. The fund holds about 225 companies in its basket, sees good volume, and charges investors a fee of 25 bps a year.
Like its MDYG counterpart, the product is widely spread out across each security and sector. The fund is by far is one of the largest and most popular ETFs, having accumulated around $3.8 billion in its asset base.
The P/E and B/V ratio is quite high for the fund at just over 28 and 4, respectively, suggesting an incredible focus on growth. This approach has largely paid off in terms of performance, as IJK has gained about 14% so far in 2013 and nearly 27.8% over the trailing one-year period.
This product also has a top Zacks ETF rank with Low risk outlook, suggesting that it is poised to outperform in the long run and especially over other choices in the space (read: Zacks ETF Rank Guide).
First Trust Mid Cap Value AlphaDEX Fund (FNK - ETF report)
For a slightly more ‘active’ choice in the mid cap world, investors should consider FNK for quality exposure. The fund is a bit pricey, as it charges 70 basis points a year in fees, and has a small volume of about 23,000 shares a day. It has managed assets worth $17.9 million so far in the year.
The reason for this extra cost is the AlphaDEX methodology, which seeks to taper the mid cap space to only the best positioned companies. It ranks the stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of the stocks.
As such, FNK should generate positive alpha relative to traditional passive indices since it uses AlphaDEX methodology and allots higher weights to more favorably ranked firms.
Still, roughly 165 stocks are in this fund’s basket, with financials and consumer discretionary taking the top two spots (read: Time for This Top Ranked Financial ETF?). The product is well spread out across individual security as it puts roughly 11% of its assets in the top 10 holdings. None of the individual securities hold more than 1.2% share. Guess (GES), Oil States International (OIS) and Exelis (XLS) occupy the top three positions in the basket.
The product has a top Zacks ETF Rank of 1 or ‘Strong Buy’ with Medium risk outlook though, and appears poised to lead the market higher. The fund has moved higher by over 17% YTD and 33.6% in the trailing one-year time frame.
To sum up, we believe that the mid cap space has been a solid performer when looking at both the year-to-date timeframe and long-term perspective. Though small cap is leading at present, mid caps are outpacing the large cap counterparts (see more ETFs in the Zacks ETF Center).
Given the solid history of outperformance, investors shouldn’t forget the mid cap space and should take a closer look at a few of the top Ranked ETFs in this sector for excellent exposure that could potentially provide investors with some more outperformance in the coming months as well.
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