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Inside the Only Mid Cap ETF Winner in this Slump

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Markets have been extremely sluggish over the past month. All nine of the major sectors are in the red for the trailing 30 day time frame, as Fed pressures have weighed on the entire market.

Given this broad based weakness, investors shouldn’t be surprised to note that ETFs of a variety of cap levels have also been under pressure as of late too. In both the small and large cap segments, only a handful of funds are in the green for the trailing one month, while in the mid cap space, just a single fund has managed to break the trend and post gains in the time frame.

The Lone Mid Cap Winner

The only fund in this segment which has managed to see gains in the past month is the Guggenheim S&P 400 Pure Value ETF (RFV). The product is little appreciated with under $60 million in assets, but it has been holding up quite well with a gain of about 1.6% in the past month, and a gain of 37.7% in the past year (read Mid Cap ETF Investing 101).

This compares extremely favorably with the two most popular choices in the mid cap world, IJH and MDY. These two both have more than $12 billion in assets under management, but they have lost about 1.6% in the past month, and ‘only’ gained about 31% in the trailing one year time frame.

Given these performance figures, it is pretty clear that RFV has been an all-star compared to its counterparts in the space. So if investors are thinking about making a play on the mid cap market, this often-overlooked Guggenheim fund could make for an excellent choice that has shown a strong history of outperformance.

For investors seeking to learn more about this diamond in the rough, we have taken a closer look at this strong mid cap in greater detail below, in order to find out what is behind this fund’s history of strong performance:

RFV in Focus

This ETF tracks S&P MidCap 400 Pure Value Index, a benchmark that holds about 100 stocks in its basket. The focus of the fund looks to be on lower risk securities that have modest PE ratios, and low Price-to-Book ratios as well.

While this might sound similar to what many other funds employ in their value-centric funds, investors should note that this ETF only has a ‘pure’ focus. This means that for all mid cap stocks, they are determined to be value, growth, or neither; there is no overlap and a company cannot be in both growth and value benchmarks (also see Forget SPY, Focus on Mid and Small Cap ETFs).

The stipulation of only being classified as one of the trio greatly limits the total number of stocks included in the ETF, especially when compared to other funds in the space. However, it does ensure that only the stocks that have the best value characteristics are included in RPV, potentially resulting in a better portfolio.

At time of writing, this resulted in a portfolio that had a PE just below 20, and a Price-to-Book ratio sneaking in below two. Dividends are a bit light too, and particularly so when considering the value focus.

In terms of sector exposure, industrials and financials both account for just about 21% of assets, while technology and health care round out the top four. Stocks are also well diversified from an individual holding perspective, as no single company makes up more than 3% of assets (see Create a Diversified Portfolio Using ETFs).

The main downsides for the ETF are in its somewhat elevated expense ratio which comes in at 40 basis points a year. This compares extremely unfavorably with some of the other big names in the space that charge about 25 basis points a year.

Furthermore, RFV, with just under $60 million in AUM, isn’t exactly the most popular ETF in the space. This leaves the fund with paltry trading volumes, and the potential for wider bid ask spreads which can increase total costs.

Yet even when taking this into account, RFV has been a compelling option that has trounced many other—and ultra popular-- names in the space. Its history of outperformance stretches back for over five years, beating out both the most popular regular mid cap ETFs and two of the most popular value mid cap funds as well in the time frame (IWS, IJJ), suggesting that a pure approach could be the way to go.

Bottom Line

RFV may be a bit pricier than what investors are used to in the mid cap market, and thus inappropriate for ultra low cost investors. The fund isn’t exactly the most popular either, so bid ask spreads may be a little wide here, adding to total costs (also see all the Top Ranked ETFs).

Still, the fund has shown a strong history of outperformance, even when taking into account its elevated cost. And with its interesting methodology—which only includes the purest of value companies—this could be a fund that is worth delving deeper into, especially if you are looking for a top choice in the competitive, but usually ignored, mid cap ETF market.

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