Trending
Often overlooked mid-cap stocks have been in a funk over the past couple of years. Even when extending some leeway for 2022, when equities across the board faltered, it cannot be ignored that stocks in the middle lagged in 2023.
Over the past 24 months, the S&P MidCap 400 Index rose just 1.1%. It remains to be seen if the thesis is borne out, some experts believe there will be more upside for this asset class as 2024 unfolds.
Plus, advisors with client bases that aren’t intimately familiar with mid-caps don’t have to stretch to articulate the benefits of this segment of the market. One way – an accurate one at that – for advisors to articulate mid-caps to clients is this is a market segment with superior growth prospects relative to large-caps and better balance sheets, broadly speaking, compared to smaller companies.
Advisors, Be Selective with Mid-Cap Strategies
For advisors considering revisiting mid-cap stocks in 2024, it’s likely that some are considering index funds or exchange traded funds. That’s smart because the mid-cap arena can be notoriously difficult to stock pick in, meaning that active fund managers can struggle here.
Still, some selectivity is warranted with passive mid-cap strategies because while many offer the benefit of low fees, it’s also been pure beta funds that have been the bigger disappointments among passive mid-cap offerings. Fundamentally weighted funds could be the astute way to access mid-caps. Those include the U.S. MidCap Dividend Index (WTMDI), which is tracked by the WisdomTree U.S. MidCap Dividend Fund (DON).
DON is dividend-weighted, which has provided for long-term outperformance of a significant majority of active and passive mid-cap funds. The ETF’s focus on payouts also makes its sector allocations and, thus, its rebalances important, too. DON’s index recently completed a rebalance.
“The sector composition of the dividend-paying mid-cap market exhibited marginal changes after the rebalance, as WTMDI tilted slightly more toward Consumer Staples and Real Estate, primarily at the expense of Industrials and Information Technology,” notes WisdomTree’s Brian Manby.
DON shares 239 holdings with the Russell Midcap Value Index and 72.2% of the ETF’s components are found in that gauge. However, the ETF differs dramatically from that gauge.
“Relative to the Russell Midcap Value Index, however, the sector changes were more pronounced. The addition to Consumer Staples resulted in a new relative over-weight allocation, while reductions in Health Care, Industrials and Information Technology increased existing under-weight allocation,” adds Manby. “Another existing under-weight, in Real Estate, was trimmed by adding weight, while modest reductions pared a prior over-weight in Energy.”
Fundamentals and More Purity
One of the issues with mid-cap investing that’s confounded advisors and retail advisors alike is that many fund managers and index providers can take liberties with defining mid-cap. There was a time when that universe was limited to stocks with market caps of $2 billion to $10 billion, but peruse the mid-cap ETF universe and it’s likely an advisor will find multiple funds where the holdings’ average market values are in excess of $10 billion. Sometimes by wide margins.
As for DON, the ETF endeavors to live up to the strict definition of mid-cap while providing a robust fundamental play on this asset class.
“The annual rebalance also enhanced the fundamentals of the Index, as WisdomTree’s screening parameters and weighting technique directly improved exposures, valuations and yields,” concludes Manby. “WTMDI is closer to a pure-play mid-cap Index, as it essentially cut the mid-cap market in half with about 335 constituents and 63% of true mid-cap ($2 billion–$10 billion in market capitalization) exposure. The Russell Midcap Value index skews larger in both constituency and size, with roughly 700 names and only 25% in true mid-cap weight.”