As issuers of exchange-traded funds continue pushing the envelope when it comes to lower fees, an increasing array of market segments are getting cheaper for investors to access. No longer are low-fee equity funds solely reserved for the large-cap space.
Investors can tap smaller stocks, including mid-caps, via ETFs that are considered downright cheap. The Schwab U.S. Mid-Cap ETF SCHM is one of the low-cost leaders among mid-cap ETFs. SCHM's annual fee is just 0.05 percent, or $5 on a $10,000 investment. For the moment, and things like this are always subject to change in the ETF industry, SCHM is less expensive than competing funds from rivals iShares and Vanguard.
SCHM, which turns 7 years old in January, follows the Dow Jones U.S. Mid-Cap Total Stock Market Index. The ETF is plain vanilla, cap-weighted fund, which helps keep its fee low.
Mid-Cap Diversification
SCHM holds 504 stocks, and the ETF's top 10 holdings combine for just 4 percent of the fund's weight with none of those holdings exceeding weights of 0.4 percent. That enhances diversification while minimizing single stock risk.
SCHM's “top 10 holdings represent about 4 percent of assets, compared with the mid-blend Morningstar Category average of 24 percent,” said Morningstar in a note out Friday. “This fund’s average market capitalization is about 15 percent smaller than the category average.”
Some cap-weighted mid-cap ETFs have a tendency to drift into the lower end of the large-cap spectrum, meaning SCHM's lower average market value can provide investors with a purer avenue to mid-cap stocks. Mid-cap stocks have historically outperformed their large-cap peers while being less volatile than small caps.
A Solid Track Record
Although SCHM has not yet reached the much ballyhooed 10-year mark that many fund industry observers celebrate, its record to date is solid.
“The fund outpaced the mid-cap blend category by 1.8 percentage points annually from its inception in January 2011 through September 2017,” said Morningstar. “The fund’s risk-adjusted returns, as measured by its Sharpe ratio, also landed in the category’s top quintile over the same period. Much of this relative outperformance can be attributed to the fund's sizable fee advantage and smaller-than-average cash drag.”
Year to date, SCHM is up 13.6 percent, putting the ETF well ahead of the 10.9 percent returned by the S&P MidCap 400 Index.
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