Uncovering The Marvel Of Mid-Cap ETFs

Mid-cap stocks and the related exchange traded funds, including the iShares Core S&P Mid-Cap ETF IJH are starting to receive more attention and rightfully so, but before investors run blindly into often overlooked mid caps, knowing why stocks in the middle are durable long-term performers is essential.

What Happened

The $49.84 billion IJH, the largest mid-cap ETF on the market, tracks the S&P MidCap 400 Index, undoubtedly the marquee mid-cap benchmark.

“Mid-cap stocks are often overlooked, and yet, over the past 15 years, they have outperformed both large- and small-cap stocks,” said Morningstar in a recent note. “There is no structural reason to justify this, nor is there a reason to believe it will continue. However, mid-cap stocks warrant more attention than they currently garner.”

Why It's Important

Additionally, mid-cap stocks offer better growth potential than large-cap rivals and less volatility than smaller stocks and while there may not be structural explanations for why mid-cap stocks outperform, there are important structural differences between ETFs like IJH and the iShares Core S&P 500 ETF IVV.

“IJH provides better sector- and single-stock diversification compared with large caps, as measured by IVV,” said Morningstar. “For example, technology stocks make up roughly 17% of IJH's portfolio versus 24% for IVV. Mid-cap funds are also more diversified at a single-stock level. IJH's top 10 holdings represent about 6% of its portfolio versus about 21% for IVV.”

Financial services, industrial and technology stocks combine for about 47% of IJH's weight whereas the three largest sectors in the S&P 500 – technology, health care and financials – combine for 48% of the benchmark's weight with almost 22% devoted just to technology.

What's Next

Another factor to consider, particularly at a time when trade tensions are still running higher, is that mid caps are more domestically focused than large caps. In part, that's attributable to funds such as IJH often being overweight real estate and utilities stocks relative to the S&P 500.

“Finally, mid-caps provide more targeted exposure to the U.S. economy than large caps. Morningstar's revenue exposure by region data shows that the companies in IJH's portfolio generate roughly 77% of their revenues in the United States versus 62% for IVV,” according to Morningstar.

The average market cap of IJH's holdings is $5.1 billion, but that figure drifts beyond $15 billion in some rival mid-cap ETFs.

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