How Cheapskates Can Access Mid Caps

For investors that don't like stocks but do enjoy saving money on fund fees, exchange traded funds are highly desirable destinations. And for those looking to dance with mid-cap stocks, a desirable asset class, there are plenty of compelling ETFs for cost-conscious investors to consider.

What Happened

The Schwab U.S. Mid-Cap ETF SCHM is very much in the cheap mid-cap ETF conversation. SCHM, which debuted more than eight years ago, charges a mere 0.04% per year, or $4 on a $10,000 investment. That easily makes it one of the cheapest mid-cap ETFs on the market and Schwab clients can realize added cost benefits by trading the fund commission-free on Schwab ETF OneSource.

SCHM tracks the Dow Jones U.S. Mid-Cap Total Stock Market Index and holds 505 stocks, giving the fund a deeper roster than rivals tracking the S&P MidCap 400 Index.

SCHM's s “cost advantage has translated into strong category-relative performance over the long term,” said Morningstar in a recent note. “From its inception in January 2011 through July 2019, the fund has outperformed the category average by 270 basis points annualized while exhibiting slightly greater risk. On a risk-adjusted basis, the fund outperformed the mid-blend category average. Overall, this fund should continue to enjoy a durable long-term edge over many of its competitors thanks to its  low expense ratio and lower-than-average cash drag.”

Why It's Important

As is widely noted, investors typically gloss over mid-cap stocks in favor of larger or smaller names, but they do so at their own peril because, over long holding periods, mid caps usually outperform larger stocks and offer significantly less volatility than small caps.

“Mid-cap stocks tend to have higher long-term growth potential than large-cap stocks. This is evidenced by the Dow Jones U.S. Total Stock Market Mid Cap Index's higher earnings growth compared with the Dow Jones U.S. Total Stock Market Large Cap Index over the trailing five years through July 2019,” according to Morningstar. “Furthermore, mid-cap stocks exhibit less volatility than small-cap stocks. Over the trailing five years through July 2019, the Dow Jones U.S. Total Stock Market Mid Cap Index's annualized standard deviation of returns was 13.6% versus 15.7% for the Dow Jones U.S. Total Stock Market Small Cap Index.”

Despite those compelling traits, investors and asset allocators are usually woefully under-exposed to mid caps.

What's Next

SCHM has credibility as a late cycle play with nearly 53% of its combined weight allocated to technology, industrial and consumer discretionary stocks.

Morningstar has a “Gold” rating on the fund, the highest rating the research firm assigns to ETFs.

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