Your DON Wants To Do You A Favor: A Nifty Mid-Cap ETF

The day of his daughter's wedding was, according to Sicilian tradition, an ideal time to ask Vito Corleone for a favor. But make no mistake, the don would want that favor to be repaid.

Don't worry because there is a don that does favors without any expectations: The WisdomTree MidCap Dividend Fund (ETF) DON. This year, DON's favors include significant outperformance of traditional mid-cap indexes as well as large-cap equity benchmarks. For example, DON is outpacing the S&P MidCap 400 by 240 basis points while delivering better than triple the returns of the S&P 500.

Il Padrino ETF

DON does this with an index that yields nearly 3.2 percent, significantly more than what investors will find on other mid-cap indexes, the S&P 500 or 10-year Treasurys. DON tracks the WisdomTree MidCap Dividend Index, which weights its holdings based on cash dividend projections for the coming year. In the current environment, mid-cap ETFs have some advantages over their large-cap rivals.

Related Link: Deutschland Disappointment Could Hinder Germany ETFs

“When comparing the WisdomTree MidCap Dividend Index to the S&P MidCap 400 Index, the first thing that stands out over this period was that only one sector in the dividend-focused Index underperformed its respective counterpart in the market capitalization-weighted index: Health Care. Within Health Care, biotechnology and pharmaceuticals were strong performers, and the fact is, they don’t tend to be early dividend payers in their life cycles, thereby not gaining inclusion in the WisdomTree MidCap Dividend Index,” said WisdomTree in a note out Monday.

Consumer Discretionary And DON

As WisdomTree notes, consumer discretionary names helped drive mid-cap out-performance. That is an important factor when evaluating DON because that ETF allocates 19.2 percent of its weight to consumer discretionary names, an overweight of 710 basis points relative to the S&P MidCap 400.

Investors should also note active management often fails with mid-caps.

“Just 20 percent of all mid-cap growth and 12 percent of all small-cap growth funds outperformed the S&P MidCap 400 Growth and the S&P SmallCap 600 Growth indices, respectively. Meanwhile, 51 percent of all large-cap growth funds outperformed the S&P 500 Growth index,” said S&P Capital IQ.

Long-term data indicate dividends make a difference with mid-caps as DON has outpaced the S&P MidCap 400 by 950 basis points over the past three years.

“If a part of the dividend-paying mid-cap market appreciates quickly in price—faster than the growth of its dividends—the process of the WisdomTree MidCap Dividend Index will tilt weight away from it and toward areas where dividends have increased faster than prices. While we don’t know if mid-caps will be strongest over the next 10 years, we believe that it’s the focus on the process of mitigating valuation risk that could become more important,” added WisdomTree.