A Gold-Engraved Invitation To Mid-Cap Stocks

Large caps led the way in 2019, but there were some solid performances among smaller names. For example, the S&P MidCap 400 Index, one of the most widely followed gauges of mid-cap equities, returned 24%.

What Happened

Investors looking to get involved with oft-overlooked mid caps, one of the best-performing equity market segments, in 2020 ought to consider the iShares Core S&P Mid-Cap ETF IJH. Home to $53.6 billion in assets under management, IJH is one of the largest mid-cap ETFs.

Mid caps have some important advantages, including faster earnings growth than large-cap companies and sturdier finances than smaller companies. Those traits, among others, facilitate superior long-term outcomes.

“From Jan. 31, 1995, through Dec. 19, 2019, the S&P MidCap 400 Index outperformed the S&P 500 and the S&P SmallCap 600 indexes by 195 and 76 basis points annualized, respectively,” Morningstar said in a recent note.

Why It's Important

IJH, which tracks the S&P MidCap 400 Index, has an expense ratio of just 0.06% per year, or $6 on a $10,000 investment. Only a handful of ETFs in this category have lower fees.

“This cost advantage has translated into strong category-relative performance over the long term,” said Morningstar. “Over the trailing 10 years through June 2019, the fund outperformed the category average by 208 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 because of its low expense ratio and lower-than-average cash drag.”

Mid-cap investing means an increase in volatility relative to large-cap benchmarks as highlighted by IJH's three-year standard deviation of 14.64%, but that isn't overly turbulent and compares favorably some well-known small-cap indexes.

What's Next

“The fund's sector exposures are currently similar to the category average. It does not constrain its sector allocation, and this may lead to overallocation to some sectors as they become more richly valued and have lower expected returns,” said Morningstar.

IJH devotes 35% of its combined weight to financial services and industrial names while the technology and consumer discretionary sectors combine for 29%.

In other words, IJH leans heavily toward higher beta, cyclical sectors and its weight to defensive groups is relatively low.

Morningstar has a Gold rating on IJH, the highest rating the research firm bestows upon ETFs.

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