Finding Value And Compensation In Mid-Cap Stocks

The combination of dividends, value and mid-cap stocks can be potent, making the WisdomTree U.S. MidCap Dividend Fund DON a potentially alluring consideration for equity income investors. The $3.85 billion DON tracks a dividend-weighted index.

What Happened

While value stocks have had their share of struggles against growth equivalents across market capitalization segments in recent years, DON has been a decent performer and, over the past three years, the WisdomTree fund has been less volatile than the S&P MidCap 400 and S&P MidCap 400 Value indexes. DON's favorable volatility metrics are an important trait.

“The most straightforward way we can measure risk is by volatility, or standard deviation of returns,” said WisdomTree in a recent note. “The least-volatile quintile of mid-caps outperformed the most volatile quintile by over 300 basis points (bps) annually.”

Why It's Important

DON has a dividend yield of 2.54%, double that of the S&P MidCap 400 and 76 basis points above the yield on the S&P MidCap 400 Value Index. However, DON's components also sport robust return on equity (ROE), a quality trait that can reward investors over lenghty holding periods.

“Sorting the market on profitability—or return-on-equity (ROE)—the most profitable companies can be viewed as less risky than the least profitable,” according to WisdomTree. “The least profitable are more likely to be distressed businesses. Here, the top three quintiles handily outperformed the bottom two quintiles on profitability.”

DON devotes almost 36% of its weight to consumer discretionary and real estate stocks while the industrial and financial services combine for almost a quarter of the fund's weight.

What's Next

Over DON's 13-year history the fund has sported favorable differences relative to basic mid-cap benchmarks.

“DON added excess return relative to its market cap-weighted S&P MidCap 400 Index benchmark without adding excess risk—as measured by its lower standard deviation, smaller maximum drawdown, down capture of 79% and beta of 0.86,” according to WisdomTree.

As for value, DON trades a double-digit price-to-earnings discount against the S&P MidCap 400 Index.

“Before 2019, the last time investors saw valuations this inexpensive for DON was in the mini economic slowdown of 2011–2012,” according to WisdomTree. “Since the end of 2012, the fund has returned just over 12% annualized, about 100 bps higher than the S&P MidCap 400 Index.”

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