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The first quarter was great for the U.S. stock market with the major benchmarks logging in the best quarterly performance in many years. However, the bullish trend seems to be stalling with the rise in volatility and uncertainty as well as fading of Trump trade. This is especially true against the backdrop of feeble data and growing geopolitical tensions.
In particular, the latest round of economic data disappointed for the first time since the U.S. elections, suggesting that the economy has started to lose momentum again. The U.S. added just 98,000 jobs in March, marking the lowest level in 10 months and well below economists' expectation of 180,000. Auto sales plummeted for the third consecutive month in March, indicating a sluggish start to the spring selling season while retail sales fell for the second consecutive month (read: 2 ETFs & Stocks to Cheer Up Despite Gloomy March Retail Sales).
Geopolitics took the center stage in recent weeks on escalating tension between the United States and North Korea, a snap general election in Britain, and the French presidential election. Apart from these, the possibility of a government shutdown on April 29 if Congress does not pass the proposed spending bill and lofty valuations are weighing on the market.
All these conditions are increasing volatility in the market, putting the stocks’ returns at risk. However, the bullish sentiment for U.S. stocks remains intact with U.S. consumer confidence hovering around a 16-year high. The labor market has been on solid footing with the unemployment rate of 4.5% being at a 10-year low and the number of jobs creation outstripping growth in the working-age population.
Additionally, investors are optimistic on first-quarter earnings, which seem robust with earnings and revenue growth for the period currently tracking above the other recent periods. Overall, total earnings for the S&P 500 index are expected to be up 8.6% on 6.2% higher revenues, per the latest Earnings Outlook. This is much better than the Q4 growth of 7.4% for earnings and 4.8% for revenues, the best growth pace of the index in almost two years. Investors should note that Q1 earnings growth is expected to actually exceed the past quarter’s record (read: 4 Top Sector ETFs & Stocks to Outperform in Q1 Earnings).
In such a scenario, investors seeking to participate in the growing economy, but worried about uncertainty, should consider mid-cap stocks in the basket form.
Why Mid Caps?
While large companies are normally known for stability and the smaller ones for growth, mid caps offer the best of both the worlds, allowing growth and stability in portfolios simultaneously. These middle-of-road securities are arguably safer options and have the potential to move higher in turbulent times, especially if political issues or financial instability creeps into the picture.
While there are several ETFs available in the space, we have highlighted five that have a Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting further outperformance in the months ahead. These have potentially superior weighting methodologies that could allow these to lead the mid-cap space in the months ahead. Additionally, these funds are popular and liquid enough, making compelling choices for investors seeking a nice momentum play with lower risk (see: all the Mid Cap ETFs here):
This is the most popular ETF in the mid cap space with AUM of $38.8 billion and average daily volume of 1.5 million shares. It tracks the S&P MidCap 400 Index and holds 401 stocks in its basket with none accounting for more than 0.61% share. The fund is also widely diversified across sectors with information technology, financials, industrials, consumer discretionary, and real estate taking the double-digit allocation each. It charges 7 bps in annual fees and added 0.8% in the past one month.
With AUM of $15.4 billion, this product tracks the Russell MidCap Index. In total, it holds 793 securities with none accounting for more than 0.80% of assets. Information technology, consumer discretionary, industrials, financials, and real estate are the top five sectors with double-digit exposure each. The ETF charges 20 bps in annual fees and trades in a solid volume of 286,000 shares a day. It gained 0.6% in the trailing one-month period.
This fund targets the growth segment of the mid-cap space by tracking the CRSP US Mid Cap Growth Index. Holding 157 securities in its basket, it is highly diversified across each component with none holding more than 1.9% share. In terms of sector exposure, industrials occupies the top position at 24%, followed by financials (19.4%), technology (16.5%), healthcare (12.7%) and consumer services (11.2%). The product has managed nearly $4 billion in its asset base and trades in good volumes of around 134,000 shares. Expense ratio comes in at 0.08%. VOT has gained 0.8% over the past one-month period (read: 5 Unbeatable ETF Strategies for Q2).
This product offers exposure to 242 mid-cap stocks whose earnings are expected to grow at an above-average rate relative to the market. It follows the S&P MidCap 400 Growth Index, charging investors 25 bps in annual fees. The ETF is widely spread out across components with none of the securities holding more than 1.18% of assets. However, it is slightly skewed toward information technology sector at 21.9% while industrials, consumer discretionary, financials, healthcare, and real estate receive a double-digit exposure each. IJK has amassed $6.2 billion in its asset base while trades in average daily volume of more than 142,000 shares. It rose 1.1% over the past one month.
This ETF has accumulated $3.2 billion in its asset base and trades in solid volume of around 327,000 shares a day on average. It tracks the Dow Jones U.S. Mid Cap Total Stock Market Index, holding 517 securities in its basket with none accounting for more than 0.77% of assets. Here, financials, information technology, industrials, consumer discretionary, and real estate make up for the top five sectors with a double-digit allocation each. SCHM charges 5 bps in fees per year and gained 1.1% in the same time frame.
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Buy-Ranked Mid-Cap ETFs for a Shaky Market
The first quarter was great for the U.S. stock market with the major benchmarks logging in the best quarterly performance in many years. However, the bullish trend seems to be stalling with the rise in volatility and uncertainty as well as fading of Trump trade. This is especially true against the backdrop of feeble data and growing geopolitical tensions.
In particular, the latest round of economic data disappointed for the first time since the U.S. elections, suggesting that the economy has started to lose momentum again. The U.S. added just 98,000 jobs in March, marking the lowest level in 10 months and well below economists' expectation of 180,000. Auto sales plummeted for the third consecutive month in March, indicating a sluggish start to the spring selling season while retail sales fell for the second consecutive month (read: 2 ETFs & Stocks to Cheer Up Despite Gloomy March Retail Sales).
Geopolitics took the center stage in recent weeks on escalating tension between the United States and North Korea, a snap general election in Britain, and the French presidential election. Apart from these, the possibility of a government shutdown on April 29 if Congress does not pass the proposed spending bill and lofty valuations are weighing on the market.
All these conditions are increasing volatility in the market, putting the stocks’ returns at risk. However, the bullish sentiment for U.S. stocks remains intact with U.S. consumer confidence hovering around a 16-year high. The labor market has been on solid footing with the unemployment rate of 4.5% being at a 10-year low and the number of jobs creation outstripping growth in the working-age population.
Additionally, investors are optimistic on first-quarter earnings, which seem robust with earnings and revenue growth for the period currently tracking above the other recent periods. Overall, total earnings for the S&P 500 index are expected to be up 8.6% on 6.2% higher revenues, per the latest Earnings Outlook. This is much better than the Q4 growth of 7.4% for earnings and 4.8% for revenues, the best growth pace of the index in almost two years. Investors should note that Q1 earnings growth is expected to actually exceed the past quarter’s record (read: 4 Top Sector ETFs & Stocks to Outperform in Q1 Earnings).
In such a scenario, investors seeking to participate in the growing economy, but worried about uncertainty, should consider mid-cap stocks in the basket form.
Why Mid Caps?
While large companies are normally known for stability and the smaller ones for growth, mid caps offer the best of both the worlds, allowing growth and stability in portfolios simultaneously. These middle-of-road securities are arguably safer options and have the potential to move higher in turbulent times, especially if political issues or financial instability creeps into the picture.
While there are several ETFs available in the space, we have highlighted five that have a Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting further outperformance in the months ahead. These have potentially superior weighting methodologies that could allow these to lead the mid-cap space in the months ahead. Additionally, these funds are popular and liquid enough, making compelling choices for investors seeking a nice momentum play with lower risk (see: all the Mid Cap ETFs here):
iShares Core S&P Mid-Cap ETF (IJH - Free Report)
This is the most popular ETF in the mid cap space with AUM of $38.8 billion and average daily volume of 1.5 million shares. It tracks the S&P MidCap 400 Index and holds 401 stocks in its basket with none accounting for more than 0.61% share. The fund is also widely diversified across sectors with information technology, financials, industrials, consumer discretionary, and real estate taking the double-digit allocation each. It charges 7 bps in annual fees and added 0.8% in the past one month.
iShares Russell Mid-Cap ETF (IWR - Free Report)
With AUM of $15.4 billion, this product tracks the Russell MidCap Index. In total, it holds 793 securities with none accounting for more than 0.80% of assets. Information technology, consumer discretionary, industrials, financials, and real estate are the top five sectors with double-digit exposure each. The ETF charges 20 bps in annual fees and trades in a solid volume of 286,000 shares a day. It gained 0.6% in the trailing one-month period.
Vanguard Mid-Cap Growth ETF (VOT - Free Report)
This fund targets the growth segment of the mid-cap space by tracking the CRSP US Mid Cap Growth Index. Holding 157 securities in its basket, it is highly diversified across each component with none holding more than 1.9% share. In terms of sector exposure, industrials occupies the top position at 24%, followed by financials (19.4%), technology (16.5%), healthcare (12.7%) and consumer services (11.2%). The product has managed nearly $4 billion in its asset base and trades in good volumes of around 134,000 shares. Expense ratio comes in at 0.08%. VOT has gained 0.8% over the past one-month period (read: 5 Unbeatable ETF Strategies for Q2).
iShares S&P Mid-Cap 400 Growth ETF (IJK - Free Report)
This product offers exposure to 242 mid-cap stocks whose earnings are expected to grow at an above-average rate relative to the market. It follows the S&P MidCap 400 Growth Index, charging investors 25 bps in annual fees. The ETF is widely spread out across components with none of the securities holding more than 1.18% of assets. However, it is slightly skewed toward information technology sector at 21.9% while industrials, consumer discretionary, financials, healthcare, and real estate receive a double-digit exposure each. IJK has amassed $6.2 billion in its asset base while trades in average daily volume of more than 142,000 shares. It rose 1.1% over the past one month.
Schwab U.S. Mid-Cap ETF (SCHM - Free Report)
This ETF has accumulated $3.2 billion in its asset base and trades in solid volume of around 327,000 shares a day on average. It tracks the Dow Jones U.S. Mid Cap Total Stock Market Index, holding 517 securities in its basket with none accounting for more than 0.77% of assets. Here, financials, information technology, industrials, consumer discretionary, and real estate make up for the top five sectors with a double-digit allocation each. SCHM charges 5 bps in fees per year and gained 1.1% in the same time frame.
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Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>