Why Should You Buy Mid-Cap ETFs?
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After an astounding performance in the first half of 2024, Wall Street has been witnessing wild swings in recent weeks. While recession fears have kept investors on edge, bets over Fed rate cuts in September may fuel optimism in the stock market.
In such a scenario, mid-cap investing can be a strong option, offering a unique balance between growth and stability, diversification benefits, and potential for undervalued opportunities. While there are several ETF choices available in the mid-cap space, we have highlighted some that currently boast a Zacks ETF Rank #1 (Strong Buy) or #2 (Buy) rating, suggesting their outperformance in the months ahead.
These include Vanguard Mid-Cap ETF (VO - Free Report), SPDR Portfolio S&P 400 Mid Cap ETF (SPMD - Free Report), Vanguard S&P Mid-Cap 400 ETF (IVOO - Free Report), Vanguard Mid-Cap Value ETF (VOE - Free Report), and iShares Russell Mid-Cap Value ETF (IWS - Free Report).
Volatile Trend
U.S. stocks saw a massive sell-off in early August following a weaker-than-expected U.S. jobs report, which fueled fears of a potential recession and sent the tech-heavy Nasdaq Composite Index into correction territory. However, the S&P 500 and the Nasdaq Composite Index rose for the eighth consecutive session early this week, which is the longest winning streak of this year.
The Fed minutes released this week showed that most officials favored a September rate cut if inflation continued to cool. The rounds of economic data this month, pointing to a slowdown in the economy, also reinforced bets that policymakers will cut interest rates in September.
The labor market cooled in July as the economy added 114,000 jobs, 35% fewer than expected. Unemployment rose to 4.3% — the highest since October 2021 — and represented the fourth consecutive monthly increase. U.S. manufacturing activity dropped to an eight-month low in July amid a slump in new orders.
Additionally, a big downward revision in U.S. payrolls for the 12-month period through March 2024 supports the rate cuts. The Bureau of Labor Statistics’ preliminary annual benchmark review of employment data showed that the U.S. economy created 818,000 fewer jobs last year than originally reported. It marks the largest downward revision since 2009.
Market participants are now pricing in a 100% chance of a rate cut next month, according to CME Group’s FedWatch tool. Lower interest rates generally lead to reduced borrowing costs, which help businesses expand their operations more easily, resulting in increased profitability. This, in turn, stimulates economic growth and provides a boost to the stock market.
The upbeat data on inflation and retail sales has reassured investors, supporting the view that the world’s largest economy is heading for a “Goldilocks” scenario of contained inflation accompanied by resilient growth. U.S. annual inflation dipped below 3% annually in July for the first time since 2021, while retail sales registered the biggest increase in a year and a half, indicating resilient consumer spending.
Nevertheless, the big technology companies, which again led the charge after a massive sell-off in early August, appear overvalued. Political uncertainty, ranging from the U.S. election in November to the prospect of increased Middle East tensions, continues to keep investors on their toes.
Why Mid-Caps?
Large-cap stocks tend to be household names with established businesses, while small-cap stocks offer the excitement of undiscovered opportunities. Mid-cap stocks occupy a unique position in the market, combining the stability of large-cap stocks with the growth potential of small-cap ones.
Mid-cap companies occupy a sweet spot in the market, as they have typically outgrown their small-cap counterparts and proven their business models, but have not yet reached the size and maturity of large-cap companies. This transitional stage often results in higher growth rates and attractive risk-return characteristics.
Including mid-cap stocks in a portfolio can provide valuable diversification benefits, as they often exhibit different risk-return characteristics compared to large-cap and small-cap stocks. This diversification can help reduce the overall risk of a portfolio, particularly during periods of market volatility, by spreading investments across various market segments that may be impacted differently by market fluctuations.
As a result, mid-cap stocks often exhibit greater growth potential than large-caps while providing more stability than small-cap stocks.
ETF Picks - Vanguard Mid-Cap ETF (VO - Free Report)
The Vanguard Mid-Cap ETF tracks the CRSP US Mid-Cap Index. It holds 316 stocks with a well-diversified portfolio, with each firm holding no more than 1% of the total assets. The ETF has key holdings in industrials, technology, financials, and consumer discretionary. With AUM of $66.6 billion, the ETF charges investors 4 bps in fees per year and has a Zacks ETF Rank #2 (Buy).
SPDR Portfolio S&P 400 Mid Cap ETF (SPMD - Free Report)
The SPDR Portfolio S&P 400 Mid Cap ETF tracks the S&P MidCap 400 Index and holds 401 stocks in its basket, with each accounting for no more than 1% share. Industrials, financials, and consumer discretionary are the top three sectors in the fund, with a double-digit allocation each. The ETF has accumulated $10.6 billion in its asset base. It charges 3 bps in annual fees, and it has a Zacks ETF Rank #2 (Buy).
Vanguard S&P Mid-Cap 400 ETF (IVOO - Free Report)
The Vanguard S&P Mid-Cap 400 ETF offers exposure to broad mid-capitalization stocks. It follows the S&P MidCap 400 Index, holding 402 securities with none accounting for more than 0.7% share. Industrials, financials, and consumer discretionary are the top three sectors, with double-digit exposure each. The ETF has managed $2.1 billion in its asset base. The fund charges 10 bps in annual fees, and it has a Zacks ETF Rank #2 (Buy).
Vanguard Mid-Cap Value ETF (VOE - Free Report)
The Vanguard Mid-Cap Value ETF follows the CRSP US Mid Cap Value Index, which measures the investment return of mid-capitalization value stocks. It holds 191 stocks in its basket, with each accounting for less than 1.5% of the assets. Industrials, financials, utilities, and consumer discretionary are the top four sectors in the fund, with double-digit exposure each.
The Vanguard Mid-Cap Value ETF has amassed $17 billion, and it charges 7 bps in fees per year. Additionally, the ETF has a Zacks ETF Rank #1 (Strong Buy).
iShares Russell Mid-Cap Value ETF (IWS - Free Report)
Finally, the iShares Russell Mid-Cap Value ETF offers exposure to mid-capitalization U.S. equities that exhibit value characteristics. It follows the Russell MidCap Value Index, and it holds 715 stocks in its basket. With AUM of $13 billion, the ETF has key holdings in industrials, financials, and real estate that account for double-digit exposure each.
The fund charges investors 23 bps in annual fees, and it has a Zacks ETF Rank #2 (Buy).
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