ETFs have totally altered my investment strategy. Where there used to be mutual funds, with their mail-in investments and redemptions and high expense ratios, now there are ETFs that are much cheaper and can be traded in seconds via my brokerage account.
There used to be little hope of mirroring an index or finding a basket of interesting stocks that could fill out your portfolio. Now, ETFs come in all shapes and sizes, allowing investors to build out a truly diversified portfolio not only according to sector or asset allocation, but also diversified within that sector or asset allocation.
I’ve been posting my thoughts each week on three ETFs from different sectors or asset allocations, one each for the conservative investor, the aggressive investors, and the all-around investor.
Today, I’m looking at mid-cap value ETFs. Mid-cap value stocks are second only to small cap value stocks in my heart. They have the greatest chance for returning multiples of your investment over time.
According to ETFdb.com, there are 19 mid-cap value ETFs, with expense ratios ranging from just 0.09% to 1%. Their year-to-date (YTD) returns range from a loss of 25.2% to a gain of 26.3%.
Best ETFs — WisdomTree MidCap Dividend Fund (DON)
For aggressive investors, I suggest WisdomTree MidCap Dividend Fund (DON). It is the second-best ETF in its class YTD, behind a leveraged index fund, which I would avoid because of too much risk. While that leveraged fund is up 26.3%, DON is up 12.4% without the risk of leverage, and it is also hedged by holding dividend stocks.
Because of those dividend stocks, the ETF sports a 30-day SEC yield of 2.58%.
DON’s assets are diversified heavily across many sectors. And the ETF’s expense ratio is very modest at 0.38%. DON is well-diversified, with 389 stocks, so any one holding isn’t going to torpedo the ETF.
The largest holdings of this fund are complex swaps and derivatives to achieve the leverage. The actual stocks it holds include Windstream Holdings (WIN), Frontier Communications (FTR), Ameren Corp (AEE) and Dr Pepper Snapple Group (DPS).
Best ETFs — WisdomTree MidCap Earnings Fund (EZM)
If you’re a more conservative investor looking for the best ETFs, I suggest WisdomTree MidCap Earnings Fund (EZM). It’s another entry from the same fund group, with the same 0.38% expense ratio. EZM is up 6.5% YTD.
Whereas its counterpart focused on dividend value stocks, EZM goes after companies that have “generated positive cumulative earnings over the last four quarters,” and then weights them by earnings, not by market cap.
I like this quasi-managed approach for this ETF, and the diversification with a massive 604 holdings holdings. The top 10 account for only 6.9% of the total asset base, so this is one of the best ETFs when it comes to diversification in the mid-cap space.
This ETF also offers sector diversity. It has 23% of assets invested in financials, 20% in industrials, 17% in consumer discrtionary, 13% in tech, 7% in utilities, 6% in healthcare and 4% in energy.
Best ETFs — PowerShares Fundamental Pure Mid Cap Value Portfolio (PXMV)
The best ETF for all-around mid-cap value holdings might just be the PowerShares Fundamental Pure Mid Cap Value Portfolio (PXMV). The “fundamental” approach is what I like with this fund. It isn’t just a straight-ahead market-cap-weighted index that’s subject to the market’s popularity contests.
PXMV knocks out the largest 70% of cumulative fundamental weight, and then examines the next 20% of stocks. Of those, the companies selected for the index must meet certain fundamental analysis screens, including five-year average sales, cash flow, latest book value and five-year average dividend. Then the stocks are compared to the sector to see which are valued below its peers.
This ETF holds 244 stocks, which offers less diversification than its index-driven counterparts, but that also means higher likelihood of outperforming long-term. That’s exactly what we’ve seen from PXMV so far.
The top ten holdings account for only 10% of the assets, which is about the highest percentage I like to see in an ETF. The sector breakdown is 21% financials, 6% energy, 5% health care, 20% consumer cyclical, 8% tech, 15% industrial, and 6% consumer defensive.
The “fundamental” approach has led it to include the following in its top three holdings: Tesoro (TSO), Windstream Holdings (WIN) and Whirlpool Corp (WHR). PXMV has a reasonable expense ratio of 0.39%.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.