As the economy and the stock market seem to finally be moving in an upwards direction, many investors are once again moving away from the safe havens of money markets and treasuries and are beginning to dial up their risk factors. While many sectors of the market have experienced nice run-ups in the past few weeks, there are still a few areas where long-term investors can benefit from the changes in the economic cycle.
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The Middle Child
A region that often goes missing from most portfolios is a concentration in mid-cap companies. Middle capitalization companies typically fall between a market of $2 billion and $10 billion, have stronger revenue and earnings than many of their high-flying small-cap sisters, while historically providing long-term returns better than their large-cap peers. The behemoth-weighted S&P 500 (NYSE:SPY) over a 10-year period ending on 9/30/2009 has produced a return of negative 0.21% while the slightly smaller, mid-cap based S&P 400 has produced returns of 7.48% in the same time period.
Long-term research has also suggested that as the economy moves out of recession, mid-caps typically perform quite well as they are able to capitalize on the assets of their smaller fallen competitors. In addition, the sector seems ripe for investment as the global crisis has left mid-caps at their lowest valuations not seen since the early 1990s, and several indicators, such as price to sales, are at all time historical lows.
Adding the Sector to a Portfolio
During the last bull market, many analysts touted the benefits of small-cap and large-cap sector rotation. Focus was shifted from straight market cap funds to industry- and country-specific funds. However, straight indexing is still alive and well, and through the Wall Street exchanged-traded fund boom, mid-caps are once again finding their place in the sun. Currently, there are several funds available, divided among growth and value, but the broad-based ETFs that follow a straight mid-cap index are the best to play this often ignored sector of the market. (For related reading, check out ETFs Smooth Road For Sector Rotation Strategies.)
The Best Picks
The broad-based S&P 400 mid-cap index is the gold standard listing in the sector and most of the ETFs are designed to track it. The oldest is State Street's Mid Cap SPDR ETF (NYSE:MDY). The fund has also garnered the lion's share of assets in the area, at nearly $8 billion, and has the highest traded volume at a three-month average of 3.5 million shares a day. There's not one holding that comprises more than 1% of assets and top holdings are varied, including oil driller Pride International (NYSE:PDE) and hard drive manufacturer Western Digital (NYSE:WDC).
Expenses for the SPDR run at 0.25% annually and the ETF yields 1.33%. Investors wanting to shave a little off their expenses can do so by sacrificing a little in the way of tradability. With only averaging 800,000 shares daily, the iShares S&P Mid Cap 400 Index (NYSE:IJH) is an identical fund to the SPDR, but only charges 0.21% in expenses.
Alternatives
Aside from the traditional indexes in the sector, there are several funds that apply a different methodology in order to gain returns. From the dividend-masters at WisdomTree comes the WisdomTree Mid Cap Dividend ETF (NYSE:DON). The fund separates and orders the mid- cap space based on dividends paid. Financials make up nearly 37% of the ETF. Yield for the fund is a market beating 3.27% and charges 0.38% in expenses.
RevenueShares Mid Cap (AMEX:RWK) also takes a different approach in indexing. Follow the S&P 400, RWK is revenue-based weighted, rather than market-cap weighted like the SPDR or iShares fund. This causes the order of the index to be different as well as the amount of weighting in each holding. Currently, the top holdings for the fund amount to nearly 20% of total assets. So far the fund has not managed to catch on, and only time will tell if the revenue-weighting strategy will be worth the fund's 0.54% in expenses.
Bottom Line
As the global economy seems to be moving in a positive direction, many sectors of the market are having a resurgence. An often overlooked portion of the market are mid-cap companies. These "just right" stocks offer growth as well as high historical returns and today they are trading at never before seen lows. The preceding ETFs offer an easy way to add a broad-based mid-cap fund to any portfolio and capitalize on that long-term growth. (For more, check out Determining What Market Cap Suits Your Style and Market Capitalization Defined.)
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