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Mid-Cap ETFs to Shrug Off Trade, Fed & Overvaluation Woes

Sanghamitra Saha
Updated
Crown Castle (CCI) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

Mid-caps are an often-overlooked investing option. These securities are viewed as big and safe compared to the highly volatile small-cap exposure. But when compared to the stability of large caps, these are relatively risky bets. However, investors ignoring this key segment of the investing spectrum should note that many mid-cap ETFs have been hovering around 52-week highs of late.

What’s Acting Against Large Caps?

The global market, though steady after a positive meeting between U.S. President Donald Trump and North Korea chief North Korean leader Kim Jong Un, still face trade tensions. The latest G-7 summit where Trump criticized allies, mainly Canada president Trudeau, gives cues of the same.

His comments raised questions over the end of trade tensions. In fact, worries over the future of the North American Free Trade Agreement (NAFTA) also flared up. Plus, several developed economies, including the Euro zone, have been slowing down.

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The Eurozone economy expanded 0.4% sequentially in the first quarter of 2018, following a 0.7% rise in the previous period. Canada’s first-quarter GDP marked the slowest expansion since a 0.3% shrinkage in the second quarter of 2016. Meanwhile, the British economy expanded 0.1% sequentially in the quarter, representing the lowest growth since a 0.1% contraction in the fourth quarter of 2012.

This sudden slowdown in foreign economies might make some investors cautious about large-cap stocks because of their higher foreign exposure. Prospects of a stronger dollar, given a hawkish Fed, may also hurt such stocks.

Wil the Small-Cap Rally Last?

Meanwhile, the U.S. economy has been on steady grounds. This boosted small-cap equities, which are mostly domestic-focused.  Apart from this, insulation from trade tensions and upbeat earnings sent small-caps rallying in recent times. No wonder the S&P Small-Cap 600 Index (up over 11%) has beaten the large-cap S&P 500 Index (up about 4%) this year.

But at 20.3 times expected earnings, small-cap stocks are pricier than the bigger counterparts in the S&P, which has an expected P/E ratio of 17.5x, per Bloomberg. The difference of 2.84 times has increased from 2.16 at the end of March. So, the overvaluation of smaller-caps is concerning (read: 6 Smart-Beta Small-Cap ETFs to Pick if the Rally Softens).

Reasons for Mid-Cap Investing

All in all, the situation is not favorable for small or large caps. Thus, it is advisable to take a middle-of-the-road approach and gain exposure to a space that offers best of both worlds. In this regard, we highlight a few mid-cap ETFs that have beaten small-cap ETF IWM (up 3.1%) and S&P 500 based fund SPY (up 2.4%)in the last 10 days (as of Jun 11, 2018).

Invesco S&P MidCap 400 Pure Value ETFRFV – up 6.1%

The fund is based on the S&P MidCap 400 Pure Value Index and puts double-digit weights in Energy (18.56%), Financials (17.52%), Consumer Discretionary (16.82%), Industrials (13.51%) and Information Technology (11.6%). The fund charges 35 bps in fees (read: What Makes Value ETFs a Winner in the 9-Year Bull Market?).

Oppenheimer Mid Cap Revenue ETF (RWK) – up 4.3%

The underlying OFI Revenue Weighted Mid Cap Index is constructed by re-weighting the constituent securities of the S&P MidCap 400 Index according to the revenue earned by the companies in the S&P MidCap 400 Index. It charges 39 bps in fees. Consumer Discretionary (18.6%), Information Technology (17.0%), Industrials (16.4%) and Financials (10%) are the top sectors of the fund.

Vanguard S&P Mid-Cap 400 Value ETF IVOV – up 3.3%

The fund targets the S&P MidCap 400 Value Index. Financials (19%), Industrials (13.8%), Information Technology (10.5%) and Real Estate (10.3%) hold the top four spots of the geographic exposure. The fund charges 20 bps in fees.

Invesco FTSE RAFI US 1500 Small-Mid ETF PRFZ – up 3.5%

The fund follows the FTSE RAFI US 1500 Small-Mid Index. The fund has double-digit exposure to financials (17.83%), industrials (17.49%), consumer discretionary (16.03%) and information technology (15.1%). The expense ratio of the fund is 0.39%.

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SPDR-SP 500 TR (SPY): ETF Research Reports
 
ISHARS-R 2000 (IWM): ETF Research Reports
 
OPP-MC REVENU (RWK): ETF Research Reports
 
GUGG-SP 400 PV (RFV): ETF Research Reports
 
PWRSH-F/R US150 (PRFZ): ETF Research Reports
 
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