One of the biggest problems investors face is balancing growth potential while reducing risk. Go too safe with your portfolio and you’ll miss out on potential returns. Head in the opposite direction and volatility sets in and could significantly hinder your overall results. It’s a real balancing act. But perhaps the best way to balance is being in the middle. In this case, we’re talking about mid-cap stocks and the exchange-traded funds that track them.
The holdings within mid-cap ETFs are typically defined as companies between $2 billion and $10 billion in market capitalization. However, some definitions have larger market caps. The beauty is that mid-cap stocks are still growing like small-cap stocks, but they are large enough to stand on their own two feet. This gives them the best of both worlds.
Most importantly, mid-cap ETFs and stocks perform. Over the last ten years, the mid-cap focused S&P 400 has managed to produce a 15.44% annual return. That has managed to beat the large-cap S&P 500 by roughly a full percentage point and it beat the return on small-caps during that time too.
In the end, mid-cap stocks remain one of the best things you can do for your portfolio. And the following three mid-cap ETFs are a great way to add/overweight the market-cap style in your portfolio.
iShares Core S&P Mid-Cap ETF (IJH)
Expense Ratio: 0.07% or $7 annually per $10,000 invested
If you’re looking for broad, no-fuss exposure to mid-cap stocks, then the iShares Core S&P Mid-Cap ETF (NYSEARCA:IJH) can’t be beaten.
IJH tracks the previously mentioned S&P 400 and uses a full-replication strategy to produce results. This means it actually holds all 400 different mid-cap stocks in the index. Top holdings include well-known names like Domino’s Pizza (NYSE:DPZ) and garden/power tool maker Toro (NYSE:TTC). This alone makes it worthy of consideration in a portfolio.
But the real win, and the reason why it has gathered more than $45 billion in assets, is its low-cost fees.
As one of the members of iShares’ core ETFs, IJH is basically free to own with an expense ratio of just 0.07% or just $7 per $10,000 invested. The popular SPDR S&P Mid-Cap 400 ETF (NYSEARCA:MDY), which tracks the same index, is about 4x more expensive. With lower fees, the IJH has managed to outperform the MDY over their histories. And it’ll keep on doing so.
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.
WisdomTree U.S. MidCap Dividend Fund (DON)
Expense Ratio: 0.38%
One of the biggest misconceptions is that small- and mid-cap stocks can’t pay dividends. The idea is that they are forced to keep all their extra cash flows in order to grow their businesses. This couldn’t be further from the truth. In fact, mid-cap stocks are some of the best dividend growers around. The size of the company has little to do with the stability of earnings, profits and financial conservativism.
To that end, income seekers may want to consider adding mid-cap dividend payers to their portfolios and the WisdomTree U.S. MidCap Dividend Fund (NYSEARCA:DON) is the best way to do it.
DON tracks the proprietary WisdomTree U.S. MidCap Dividend Index. Here, the ETF is fundamentally weighted and designed “to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year.” Currently, DON holds more than 400 different mid-cap stocks that pay dividends. Top holdings include retailer Kohl’s (NYSE:KSS) and consumer products firm Smucker’s (NYSE:SJM).
The focus on dividend payers produces a pretty decent yield, which is currently at 2.84%. An added bonus for retirees is that the ETF pays its dividend monthly.
The focus on dividends hasn’t hurt its performance either. Kicking out the fastest growing mid-cap stocks has allowed DON to produce a 13.48% average annual return over the last ten years. That’s not shabby at all. Helping that cause is its low 0.38% expense ratio.
Invesco S&P MidCap Low Volatility ETF (XMLV)
Expense Ratio: 0.25%
Naturally, mid-cap stocks — and many mid-cap ETFs — are a tad bit more volatile than their larger sisters. For investors near or in retirement, this added volatility can cause some restless nights. But there is a way to cut that bounciness further and still benefit from all the good things that mid-caps have to offer.
The Invesco S&P MidCap Low Volatility ETF (NYSEARCA:XMLV) is a smart-beta ETF that uses various screens to kick out high-volatility stocks in order to capture the upside of the market and simultaneously eliminate the downside risk. The idea is that betting on stocks that have historically shown lower overall volatility will result in a smoother ride for portfolios. The benefits of a low-vol strategy work wonders when moving down the market-cap ladder.
XMLV combs the previously mentioned S&P 400 and chooses the 80 stocks that have been the least volatile over the last 12 months. The strategy has worked wonders. Over the last five years — it’s a new fund — the ETF has managed to return 11.77% annually. This compares to the S&P 400’s 6.03% return. And XMLV has produced that return with far fewer market movements.
For investors with shorter timelines or the inability to recoup losses, using XMLV could be a great way to play the potential of mid-cap stocks, while reducing loss potential. And they can do it for a cheap 0.25% in expenses and score a 2% yield.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.