Remember the old saying “Always a bridesmaid, never a bride?” Arguably, it applies to mid-cap stocks, but that should not be the case.
“Of the universe of 2,862 publicly listed US stocks … 46% have market capitalizations between $1 billion and $12 billion — qualifying them as mid caps,” said State Street Global Advisors (SSgA) in a recent note. “Investors who allocate only to large and small caps will lack pure beta exposure to the largest segment of US firms.”
Long-term data suggest embracing mid-cap stocks and exchange-traded funds (ETFs) is a winning bet.
“Mid-cap stocks … have delivered higher annualized returns than their large- and small-cap peers over the past 20 years,” said SSgA. “What’s more, these returns were achieved with reduced volatility relative to small caps.”
Bolstering the case for mid-cap stocks and the related ETFs is that these stocks historically perform well in the face of rising interest rates and a weaker dollar; the exact scenario facing investors today.
Not to be forgotten in the mid-cap conversation is the dividend desirability of this market cap segment. In fact, some members of the S&P MidCap 400 Index have lengthy histories of boosting payouts.
Consider these three dividend ETFs when looking to add income via mid-caps.
Mid-Cap Dividend ETFs: WisdomTree U.S. MidCap Dividend Fund (DON)
Expense Ratio: 0.38%, or $38 annually per $10,000 invested
When it comes to mid-cap dividend ETFs, the WisdomTree U.S. MidCap Dividend Fund (NYSEARCA:DON) is the undisputed king. The $3 billion DON has been around nearly 12 years, making it the oldest U.S. mid-cap dividend ETF on the market today.
DON tracks the WisdomTree U.S. MidCap Dividend Index, which is “dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share,” according to WisdomTree.
DON’s index currently yields 2.97%, well above the 1.12% found on the S&P MidCap 400 Index. This mid-cap dividend ETF allocates over 25% of its combined weight to real estate stocks and utilities.
DON carries a five-star Morningstar rating, which is not surprising given the ETF’s long-running tradition of outperforming rival actively managed funds and traditional, passive mid-cap ETFs and index funds.
Mid-Cap Dividend ETFs: ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL)
Expense Ratio: 0.4%
The ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS:REGL) is the only legitimate competitor to the aforementioned DON among U.S. mid-cap dividend ETFs. REGL, which recently celebrated its third birthday, has a decent number of followers as highlighted by more than $441 million in assets under management.
REGL uses a strategy featured on some popular large-cap dividend ETFs: a focus on dividend increase streaks. This mid-cap dividend ETF tracks the S&P MidCap 400 Dividend Aristocrats Index, which is the dividend aristocrats offshoot of the S&P MidCap 400. REGL’s index requires member firms to have raised payouts for at least 15 consecutive years.
REGL holds 44 stocks with over a quarter hailing from the financial services sector. The utilities and industrial sectors combine for nearly 29% of the fund’s weight. At the end of last year, REGL’s index had a dividend yield of 2.15%.
Mid-Cap Dividend ETFs: WisdomTree International MidCap Dividend Fund (DIM)
Expense Ratio: 0.58%
International mid-caps can be part of an income-seeking portfolio and the way to access ex-US dividend-paying mid-sized stocks is with the WisdomTree International MidCap Dividend Fund (NYSEARCA:DIM). In addition to mostly excluding U.S. stocks, DIM also does not feature exposure to Canadian mid-caps.
DIM follows a similar strategy to DON in that components are weighted on the basis of annual cash payouts delivered. The $273.1 million DIM also has a lengthy history dating back to mid-2006, allowing investors to assess the fund’s durability across multiple market environments. Since inception, DIM’s underlying index has outperformed the MSCI EAFE MidCap Index.
DIM, which yields 2.42%, allocates about 40% of its weight to Japan and the U.K. Overall, this mid-cap ETF features exposure to 23 countries, 22 of which are developed markets.
The industrial and financial services sectors combine for roughly 40% of DIM’s roster while consumer discretionary and materials names combine for another 26%.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.