While all investors have become familiar with the broad rally in large caps as of late, this has paled in comparison to smaller cap level securities. Stocks in the mid cap market are exploding out of their 52 week highs and are approaching or exceeding all-time high levels too.

Although some investors are concerned about the ability of the market to continue like this, the robustness of the market’s performance as of late is helping to soothe some of these fears. In fact, many are calling for stocks to continue to push higher in the near term, suggesting that a look to smaller cap levels—and thus higher beta picks—might be the way to go.

Investors willing to invest in this slice of the market, and take advantage of the positive trends impacting mid and small cap securities as of late, should consider looking to top Ranked ETFs in the space. One way of doing this is via the Zacks ETF Rank which helps to narrow down the broad ETF field to a more manageable level (read Focus on Earnings with These ETFs).

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio with style boxes, we have taken a closer look at the Top Ranked ETF in the Midcap space, the WisdomTree MidCap Earnings ETF (EZM - ETF report), below:

This ETF tracks the WisdomTree MidCap Earnings Index which only tracks firms that are generating earnings in the mid cap universe. This results in a robust portfolio of roughly 620 stocks, giving investors wide exposure across the cap level (see Mid Cap ETFs Leading the Market in 2013).

In terms of sector exposure, financials edge out industrials for the top spot, although each accounts for roughly 20% of the portfolio. The fund is light in utilities and staples, while it does have a good chunk in each of the various styles—such as value and growth—although there is definitely a value tilt thanks to the earnings focus.

The fund also does a great job of spreading out assets across individual securities as no one company accounts for more than 1.8% of assets. The top three stocks for the fund include American Capital (ACAS - Analyst Report), AOL (AOL - Snapshot Report), and Cliffs Natural Resources (CLF - Analyst Report).

Despite these strengths, investors should note that the fund isn’t cheap compared to the low cost choices in the space, as the ETF costs 38 basis points a year. It also doesn’t have great volume at roughly 10,000 shares a day—so bid ask spreads could be wide—although this is somewhat mitigated by the deep liquidity of the underlying holdings (see Mid Cap ETF Investing 101).

Still, we like this fund as an extremely low risk way to the recent surge by the cap level, and one that could continue to run up in the weeks ahead. For this reason, we have assigned the fund our highest score of a Zacks ETF Rank of 1 or ‘Strong Buy’, implying that we believe some outperformance is going to come for this product in the near term, and especially over other choices in the space.

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