With concerns about trade wars hitting portfolio returns, investors might consider adding some mid-cap exposure. Mid-cap companies are those with market capitalization between $2 billion and $10 billion, while large caps have $10 billion-plus and small caps range between $300 million and $2 billion.
Investors are usually light on mid-cap holdings, since like middle children, they can get overlooked by people who hold large-cap companies for their stability and prominence, or small-cap companies for their growth.
One way to add mid-cap holdings is through a mid-cap index fund. But look beyond the name. Some funds tilt to the smaller end of the mid-cap spectrum and some have a larger-cap bias.
Here are eight of the best mid-cap index funds.
iShares Core S&P Mid-Cap ETF
For a core mid-cap holding, Brian Koble, chief investment officer at Hefren-Tillotson in Pittsburgh, recommends IJH. The fund tracks the S&P MidCap 400, which is comprised of U.S. mid-cap stocks. “Companies have to meet a minimum level of profitability to be included in the S&P Index,” he says. “This helps to weed out more speculative stocks.” With an expense ratio of 0.07%, or $7 on every $10,000 invested annually, IJH beats two similar core funds that track the same index: Vanguard S&P Mid-Cap 400 ETF (IVOO) and SPDR S&P MidCap 400 ETF Trust (MDY). MDY and IVOO have expense ratios of 0.15% and 0.24%, respectively. IJH’s cost is another reason why Koble favors this exchange-traded fund.
Vanguard Mid-Cap Index ETF
Todd Rosenbluth, director of ETF Research at CFRA, says VO has been “noticeably outperforming” this year, since this ETF tilts toward the large-cap size for a mid-cap fund. It follows the CRSP US Mid Cap Index. The fund has about 370 holdings, making it a diversified mid-cap fund with a number of holdings from the different sectors. It also has a little more technology exposure than other core funds. It’s one of the cheapest mid-cap funds around, with an expense ratio of 0.04%. Its year-to-date return is up by more than 20%. For investors who want the identical exposure in a mutual fund, Vanguard offers VIMSX (VIMSX), which may be more suitable for 401(k)s, he adds.
iShares Russell Mid-Cap ETF
Rosenbluth says IWR is another example of why investors in mid caps should review the holding of their core funds. It’s a diversified mid-cap ETF, but it leans toward a smaller-size bias. It tracks the Russell Midcap Index (.RMCC), which is a market-cap weighted index of the 800 smallest companies in the Russell 1000 (.RUI). Because of the smaller-cap skew, IWR has more of a growth tilt, too, Rosenbluth says. It’s pricier than IJH and VO at 0.2%, but the fund earns back some of its fees from securities lending.
ProShares S&P MidCap 400 Dividend Aristocrats ETF
REGL is an income-producing ETF, tracking the S&P MidCap 400 Dividend Aristocrats Index. To be included, companies must have increased dividends for at least 15 consecutive years. Chuck Self, chief investment officer at iSectors in Appleton, Wisconsin, says this results in a broadly diversified portfolio, and the equal weighting means no single holding dominates the fund. Self points out REGL has a higher expense ratio than other pure index funds at 0.4%. But he says that’s offset by the income payment of 1.8%. “Over the past 30 years, dividend-growing companies as a group have outperformed dividend nonchangers, dividend nonpayers, and dividend cutters. REGL is a compelling investment,” he says.
WisdomTree International MidCap Dividend ETF
Brett Manning, senior marketing analyst at Briefing.com, says for investors who might want to rotate some of their holdings into international mid caps, DIM is a good choice. Although U.S. indexes have outperformed international indexes this year, Manning says that could change, especially if any trade deals are done or if some progress can be made on Brexit. The fund’s top two countries are Japan and the U.K., both of which could benefit if investors start favoring international markets. DIM also pays a solid dividend of 3.29%, which Manning also likes. DIM follows the WisdomTree International MidCap Dividend Index (DIM/IV).
Vanguard Mid-Cap Growth ETF
With $13.2 billion in assets under management, VOT is one of the biggest mid-cap ETFs available, with a very cheap expense ratio of 0.07%. It tracks the CRSP US Mid Growth Index and offers broad-based exposure to higher growth companies. Manning says if the Federal Reserve cuts rates, as the market is anticipating, this fund could benefit from the momentum provided by that move. He sees combining DIM and VOT as a “barbell” strategy to cover investors in the mid-cap size no matter the future market path. Morningstar gives VOT a silver rating, and with a year-to-date return of 26%, it’s handily beating the large-cap S&P 500 (.SPX).
JPMorgan Diversified Return U.S. Mid Cap Equity ETF
Daniel Milan, financial advisor and managing partner of Cornerstone Financial Services in Southfield, Michigan, likes JPME as a smart-beta pick in the mid-cap space. The fund tracks the JP Morgan Diversified Factor U.S. Mid Cap Equity Index and selects holdings based on value, momentum and quality factors, and then equal-weights the stocks by sector. The fee is cheap for smart beta, at 0.24%, something else he likes. By equally weighting the holdings, the fund has a more conservative tilt, which Milan says he prefers in a late-stage market cycle. The price-to-earnings ratio is 16.51, on the lower end for mid-caps “and it’s a sign you’re not getting a bunch of really expensive, popular stocks,” he says.
First Trust Mid Cap Core AlphaDEX Fund
Another smart-beta ETF, FNX attempts to beat the U.S. mid-cap sector by picking stocks from the S&P MidCap 400 Index using fundamental growth and value factors, and then the fund uses a tiered equal weighting for the top 75% of holdings. This fund has a growth bias, Milan says because the equal weighting gives it a tilt to smaller-sized mid-cap holdings. It has slightly higher turnover, so it can be a little more volatile than the average mid-cap fund. It costs 0.62% to hold this fund, which he says is in line with other smart-beta products.