Why ETFs Are The Better Way To Mid-Cap Stocks

Some investors may think that because mid-cap stocks are smaller than large- and mega-cap stocks, paying up for higher fee actively managed mutual funds to access this asset class. Data don't confirm that notion.

The $51.36 billion iShares Core S&P Mid-Cap ETF IJH is the largest mid-cap ETF and charges just 0.07% per year, or $7 on a $10,000 investment. However, cost-effective is just one of IJH's favorable traits.

“The average mid-cap core mutual fund rated by CFRA generated a 10.3% three-year annualized total return as of November 1, lagging the 11.7% return for iShares Core S&P Mid-Cap ETF (IJH),” CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth said in a recent note. “The collective performance was hurt by charging on average a 1.2% net expense ratio (IJH charges just 0.07), but also by stock selections.”

Why It's Important

Mid-cap stocks are often dubbed the forgotten or overlooked segment of the equity market, but historical data confirm the group's utility. Over long holding periods, mid-cap stocks often outperform large-cap stocks by sizable margins while offering less volatility than small-cap stocks.

“Despite a strong combination of growth and stability traits that should garner significant interest, mid-cap stocks remained under the radar,” Rosenbluth said.

Some data points suggest investors are warming to mid-cap ETFs. For example, IJH, which tracks the S&P MidCap 400 Index, has seen 2019 inflows of $1.19 billion.

What's Next

IJH allocates over a third of its weight to industrial and financial services stocks, giving it a cyclical fee. Adding to that cyclical bias with a growth tilt is the fund's nearly 28% combined weight to technology and consumer discretionary stocks.

Those sector leanings due create higher volatility; IJH's three-year standard deviation is almost 500 basis points higher than the S&P 500's. However, mid-cap stocks' often deliver superior risk-adjusted returns relative to their larger peers, rendering the higher volatility a moot point.

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