Goldilocks had the right idea. The middle is a great place to be. And when comes to our portfolios, that means mid-cap stocks. Mid-caps are typically defined as companies between $2 billion and $10 billion in market capitalization. Turns out, that’s the sweet spot for investors.
Featuring the stability and dividends of larger firms, and the faster growth of smaller ones, mid-cap stocks have posted amazing returns over the long-term.
In fact, the 8.36% annual return for the mid-cap focused S&P 400 over the last 10 years has crushed the larger S&P 500 by more than a full percentage point. It has beaten the return on small-caps during that time too.
So mid-cap stocks are clearly the best choice for investors looking for better returns. But how should we get your dose of mid-cap stocks? Exchange-traded funds (ETFs) of course!
There are plenty of ETFs that focus on mid-cap stocks — here are three of the best.
Mid-cap ETFs to Buy: iShares Core S&P Mid Cap ETF (IJH)
Expense Ratio: 0.07%, or $7 per $10,000 invested annually
When it comes to finding a straight bread and butter indexing solution for mid-cap stocks, the SPDR S&P Mid-Cap 400 ETF (NYSEARCA:MDY) often is at the top of their list.
It has been the traders choice for decades now. However, investors may want to consider another S&P 400 tracker for their mid-cap exposure. Namely, the iShares Core S&P Mid Cap ETF (NYSEARCA:IJH).
IJH now holds more than $40 billion in assets — roughly double the MDY — and is the largest ETF tracking mid-cap stocks. Like MDY, IJH uses a full replication strategy on the S&P 400 and owns all the stocks in the index. Top holdings include Domino’s Pizza, Inc. (NYSE:DPZ) and office building owner Duke Realty Corp (NYSE:DRE).
The reason for IJH’s growth in assets and why investors should consider it is simply fees.
IJH is basically free to own. As a member of iShares core lineup, the ETF costs only 0.07%, or $7 per $10,000 invested annually in fees. This compares to 0.25% for MDY. All things equal — and they are in this case — IJH will always outperform the mid-cap SPDR.
When it comes to investing, every little bit helps when compounded over time. And with that, investors should almost always choose IJH as their main index way to play mid-cap stocks.
Mid-cap ETFs to Buy: WisdomTree Intl. Mid-Cap Dividend F (ETF) (DIM)
Expense Ratio: 0.58%
The mid-cap outperformance phenomenon isn’t just tied to the U.S. shores. Internationally, mid-caps have also generated great returns for investors. However, most investors in the U.S. have zero exposure to them.
The WisdomTree Intl. MidCap Dividend F (ETF) (NYSEARCA:DIM) allows investors to tap into the market segment.
DIM tracks a basket of over 600 different mid-cap stocks domiciled in developed international markets. This includes Japan, Australia and Europe. The key is that the ETF has a dividend focus as well. The fund’s underlying index uses various screens to find the best dividend payers among international mid-cap stocks and then weighs them in the index based on annual cash dividends paid.
This does two things. First, DIM provides plenty of income for investors. Currently, the ETF yields 2.21%.
Secondly, DIM has outperformed its market-cap-weighted benchmark. Over the last five years, DIM has averaged 8.75% annually. The MSCI EAFE Mid-Cap Index only returned 8.62%. As we said before, every bit helps. That extra return would have helped generate an extra $2,000 for investors on a $10,000 investment since DIM’s inception in 2006.
For investors looking to expand their exposure to mid-cap stocks beyond U.S. borders, DIM makes an ideal ETF to buy.
Mid-Cap ETFs to Buy: John Hancock Multifactor Mid Cap ETF (JHMM)
Expense Ratio: 0.45%
When it comes to smart-beta or fundamental indexing, a handful of firms stand out from the pack. One of them is Dimensional Fund Advisors (DFA).
Thirty years ago, DFA was one of the first pioneers to craft indexes using factors and their mutual funds have been amazing performers over the long haul. The problem is that they are only sold by exclusive advisors and most people can’t buy into them.
But that’s where the John Hancock Multifactor Mid Cap ETF (NYSEARCA:JHMM) comes in.
JHMM uses an index designed and developed by DFA for mid-cap stocks. The ETF’s index will screen for various factors, such as smaller market-cap size, lower relative price and higher profitability in order to find higher expected returns. DFA has spent decades researching what works and what doesn’t when it comes to smart-beta investing.
And the proof is in the pudding. JHMM is a relatively new ETF — not even a year old. However, since its inception, it has managed to post 16.95% return. That’s about a percentage point more than the Russell Midcap Index in that time frame.
For investors looking for an alternative to standard market weighted indexes, it pays to go with a leader. And with JHMM, portfolios get that.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.