Many experts believe mid-cap stocks represent the sweet spot of equity investing. In other words, mid-cap companies — those with market capitalizations between $2 billion and $10 billion — provide the most compelling balance between growth potential and stability. No one can know which market capitalization cohort will perform best over the short term or long term, but, by some measures, mid-caps are very attractive right now.
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U.S. mid-cap stocks as a group have significantly underperformed large caps for most of the last 10 years. A good part of that overperformance is due to the overpowering dominance and incredible appreciation of the Magnificent Seven mega-cap stocks Apple Inc. (ticker: AAPL), Microsoft Corp. (MSFT), Nvidia Corp. (NVDA), Amazon.com Inc. (AMZN), Tesla Inc. (TSLA), Alphabet Inc. (GOOG, GOOGL) and Meta Platforms Inc. (META). What investors should realize, however, is that, excluding the Mag 7, mid-cap stocks have grown earnings faster than their large-cap counterparts.
In other words, there may be a strong structural case for buying mid-caps right now. But, as with all investment opportunities, security selection is the key to success. There are many hundreds of publicly traded mid-cap stocks. How can a retail investor know which one to choose? For many, the answer is mid-cap index funds.
The major mid-cap indexes are designed by professional asset managers or respected investment research firms. Most have established track records that go back many years. Investors can be confident that the stocks that comprise them all meet the strict criteria of the sponsors. Also, fund buyers don’t have to worry about buying or selling dozens or hundreds of individual stocks or making important position-weighting decisions. Even small investors can enjoy professional management and wide diversification.
The seven high-quality mid-cap funds on this list are notable for being cost-effective, having a history of in-line performance and providing strategic exposure to mid-caps. If your portfolio could benefit by adding mid-cap funds to the mix, check out these options:
Mid-Cap ETF | Expense Ratio | Assets | Forward Dividend Yield* |
iShares Core S&P Mid-Cap ETF (IJH) | 0.05% | $94.7 billion | 1.3% |
Schwab U.S. Mid-Cap ETF (SCHM) | 0.04% | $11.3 billion | 1.4% |
iShares S&P Mid-Cap 400 Growth ETF (IJK) | 0.17% | $9.3 billion | 0.8% |
John Hancock Multifactor Mid Cap ETF (JHMM) | 0.42% | $4 billion | 1.0% |
Vanguard Mid-Cap Index Fund ETF Shares (VO) | 0.04% | $176.9 billion | 1.5% |
Invesco S&P MidCap Momentum ETF (XMMO) | 0.34% | $4.1 billion | 0.3% |
iShares S&P Mid-Cap 400 Value ETF (IJJ) | 0.18% | $7.9 billion | 1.8% |
*As of Jan. 21 close.
iShares Core S&P Mid-Cap ETF (IJH)
With net assets of close to $95 billion, IJH is one of the largest mid-cap index ETFs on the market. The fund tracks the performance of the S&P MidCap 400 Index, which was designed to reflect the overall performance of the entire mid-cap segment of the market and is one of the premier mid-cap benchmarks on Wall Street.
IJH is not a strict replication fund. It uses a representative sampling strategy that has proven very effective in duplicating the results of the benchmark. By prospectus, a minimum of 80% of assets will be invested in components of the index at all times.
The expense ratio for IJH is 0.05%, qualifying this fund as a low-cost ETF. IJH is rebalanced quarterly but, to minimize tax implications, internal trading is kept to a minimum. The fund has a dividend yield of 1.3% and distributes income quarterly.
Schwab U.S. Mid-Cap ETF (SCHM)
SCHM mirrors the Dow Jones U.S. Mid-Cap Total Stock Market Index. The fund boasts more than $11 billion in assets. SCHM invests in the mid-cap segment of the Dow Jones Total Stock market index. Subsequently, the fund has close to 500 individual holdings, making it appropriate for investors who want to capture the performance of mid-cap issues while benefiting from an enhanced level of diversification.
The expense ratio of 0.04% — the lowest on this list — makes this a highly cost-effective fund with very little benchmark tracking error. This is a straightforward, low-cost, tax-efficient ETF that can serve as a core mid-cap investment in a diversified portfolio.
Please note, however, that SCHM is managed to be a long-term holding. The fund’s sponsors do not recommend this ETF as a short-term trading vehicle.
The fund is currently providing shareholders with a dividend yield of just over 1.4%.
iShares S&P Mid-Cap 400 Growth ETF (IJK)
IJK is a more than $9 billion ETF that offers investors an interesting and potentially profitable variation on IJH, the first and largest fund on this list. The objective of IJK is to replicate the performance of the S&P MidCap 400 Growth Index. The benchmark and the fund are made up of stocks from within the larger S&P MidCap 400 that demonstrate pronounced growth stock characteristics.
Growth stocks are thought to have the potential for above-average revenue and earnings growth which, over the long run, can lead to better financial performance and greater capital appreciation. The 2024 year-to-date total return of IJK was 15.8%.
IJK has a dividend yield of 0.8% which is somewhat less than what a broad mid-cap index fund might deliver. A lower yield, however, is not necessarily a negative. Growth stocks tend to reinvest a larger percentage of revenue and earnings into expanding the business and executing the business plan. What shareholders give up in yield they tend to make back in capital appreciation.
John Hancock Multifactor Mid Cap ETF (JHMM)
A $4 billion ETF, JHMM is sponsored and administered by John Hancock Investment Management but sub-advised by Dimensional Fund Advisors, a well-respected private asset manager.
JHMM tracks the John Hancock Dimensional Mid Cap Index, which was launched in 2015 specifically to be the benchmark for this fund.
The mid-cap stocks selected for the index and, by extension, for the fund are chosen based on a defined set of criteria that portfolio managers believe are the multiple factors that contribute to total return. The factors include market cap, value characteristics, momentum and financial fundamentals. The goal of the fund is to match the performance of the index after the 0.42% expense ratio is subtracted. The goal of the index is to outperform the mid-cap segment of the broader market.
Additionally, JHMM provides a current dividend yield of 1%.
Vanguard Mid-Cap Index Fund ETF Shares (VO)
The CRSP U.S. Mid Cap Index comprises stocks that fall within about the 80th percentile of U.S. stock market capitalization. In other words, this benchmark includes the very broad middle of the market based on company size. VO is a $177 billion fund based on that index.
VO is a cap-weighted fund, but it applies its weightings differently than other cap-weighted ETFs. VO focuses on cumulative market-cap percentages, meaning stocks are ranked by market cap and allocated by how they fall into a specified percentile range. As a result, VO has a very different sector emphasis compared to other mid-cap index funds. For example, this fund is skewed much more toward the tech sector as compared to industrials.
VO is a passively managed fund that employs a full-replication strategy. The fund strives to be fully invested at all times. A cash position is rare.
The expense ratio of the fund is 0.04%, and it has a yield of 1.5%.
Incidentally, CRSP stands for the Center for Research in Security Prices. CRSP administers several popular securities indexes across the investment spectrum.
Invesco S&P MidCap Momentum ETF (XMMO)
The S&P MidCap 400 Momentum Index is yet another variation on the S&P MidCap 400. The S&P MidCap 400 Momentum Index is, in fact, a subset of the MidCap 400. It was designed to represent the performance of mid-cap stocks with demonstrably high momentum characteristics. The $4.1 billion XMMO tracks that interesting benchmark.
In simple terms, momentum means a stock that’s had superior price appreciation over a specified time horizon — 12 months, for instance — with the expectation that the existing trend will continue. Momentum is based on the simple idea that stocks that are going up will continue to go up.
The fund has 80 holdings selected based on a proprietary momentum scoring system developed by S&P Global, a world leader in indexing and market research.
The dividend yield for the fund is only about 0.3%. The expense ratio comes in at 0.34%. Potential investors should realize that XMMO has a higher turnover rate than other funds in its peer group.
iShares S&P Mid-Cap 400 Value ETF (IJJ)
The final fund on the list is a mid-cap value ETF. The objective of IJJ is to track the performance of the S&P MidCap 400 Value Index after the fund’s 0.18% expense ratio is subtracted.
The Mid-Cap 400 focuses on midsize companies that exhibit clear value characteristics. Although the number of holdings will vary over time, the index and consequently the fund include close to half of the stocks that are in the broader Mid-Cap 400.
A value stock has a market price that is appreciably lower than its inherent or fundamental value. Data points such as price-to-earnings ratio, price-to-book ratio, price-to-revenue ratio and dividend yield are used by Wall Street analysts to establish relative value.
The rationale behind value investing is the belief that the stock price will appreciate when, sometime in the future, the broad market realizes a value stock’s potential and bids the price up.
IJJ is a fairly popular fund with almost $8 billion in net assets. The fund has a current dividend yield of 1.8%.
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7 Mid-Cap Index ETFs to Buy Right Now originally appeared on usnews.com
Update 01/22/25: This story was published at an earlier date and has been updated with new information.