Summary:
- U.S. Mid Cap Value Equities are an underutilized asset class
- U.S. Mid Cap Value Equities have compounded at a rate of 13.2% since 1972, while large cap blend equities have compounded at 10.3% during the same time-frame.
- The oldest U.S. Mid Cap Value ETF compounded at 10.7% since August 2000, while an S&P 500 index fund compounded at 5.8% during that time.
The U.S. Mid Cap Value asset class is an underappreciated and underutilized part of most people’s equity portfolios. This is understandable since investors can cover this section of the market with a myriad of other choices. If investors choose to invest in a Mid Cap Blend fund, about 50% of that fund will include mid cap value stocks. Investors could also choose a small and/or large cap value ETF and about 10% of those funds will be mid cap value companies. Additionally, investors can choose a U.S. Total Market Index fund and about 5% of that fund will be Mid Cap Value companies. All those funds are fine investments, but the U.S. Mid Cap Value index has had such a wonderful long-term track record that it would be wise to consider adding an ETF in this asset class to your equity portfolio.
U.S. Mid Cap Value vs U.S. Large Cap Blend (S&P 500): January 1972 through July 2018
Source: https://www.portfoliovisualizer.com/
As seen in the chart above, the U.S. Mid Cap Value asset class has had phenomenal returns over the last 46 years. Will it continue? Heaven only knows, but based on this information, I consider this an investable asset class and one that I am willing to put a portion of our portfolio into. An added benefit of including a mid-cap value fund in your portfolio is that this asset class is a less correlated to the U.S. Market than an S&P 500 index fund (0.91 vs 0.99). This lower correlation can be beneficial if you rebalance your portfolio periodically. Next, we’ll look at how Mid Cap Value ETFs have performed since their inception.
IJJ vs SPY: August 2000 through July 2018
Source: https://www.portfoliovisualizer.com/
The iShares S&P Mid-Cap 400 Value ETF (IJJ) is the oldest available ETF in this asset class. It’s date of inception was July 24, 2000. The outperformance of Mid Cap Value seems to persist even on the shorter timeframe of 18 years. While Mid Cap Value did not perform as well as it did over the longer period, this asset class outperformed an S&P 500 index fund by even more than it did over the longer 46-year timeframe.
We could let things rest right there and go ahead and invest in IJJ if we have decided to own a Mid Cap Value fund. But, let’s look a little deeper to see how all the Mid Cap Value funds that are 10 years old, or older, have performed. In the chart below, I have ranked all 11 of these ETFs, comparing their performance head-to-head using the back-testing tools at Portfolio Visualizer.
Source: https://www.morningstar.com/
DON vs RWK vs VOE vs IJJ: April 2008 through July 2018
Source: https://www.portfoliovisualizer.com/
Now, let’s focus on the top 4 U.S. Mid Cap Value ETFs. To do this, I like to look at each ETFs stated objectives and product summaries.
DON – WisdomTree U.S. MidCap Dividend Fund seeks to track the investment results of dividend-paying mid-cap companies in the U.S. equity market. Why DON? Gain exposure to core U.S. mid cap equity from a broad range of dividend paying companies. Use to complement or replace midcap value or dividend oriented active and passive strategies. Use to satisfy demand for growth potential and income focus.
RWK – The strategy provides access to the same securities as the S&P MidCap 400 Index, weighted by top line revenue instead of market capitalization. Why RWK? Broad exposure to the S&P 400 universe. Greater exposure to lower valuation companies than the market-cap benchmark. Consider for mid-cap exposure at the core of your portfolio.
VOE – Seeks to track the performance of the CRSP US Mid Cap Value Index, which measures the investment return of mid-capitalization value stocks. Provides a convenient way to match the performance of a diversified group of midsize value companies. Follows a passively managed, full-replication approach.
IJJ – The iShares S&P Mid-Cap 400 Value ETF seeks to track the investment results of an index composed of mid-capitalization U.S. equities that exhibit value characteristics. Why IJJ? Exposure to U.S. mid-cap stocks that are thought to be undervalued by the market relative to comparable companies. Low cost and tax efficient. Use as a complement to a portfolio’s core holdings.
Let’s take one more look at the performance of these top four Mid Cap Value ETFs and an S&P 500 index fund using the back-testing tools available at KOYFIN. KOYFIN adds a little flare by showing in the cumulative returns in a percentage format.
Source: https://www.koyfin.com/home
Just the facts, ma’am. (Jack Webb). I’m not here to sell you an ETF or an index fund. I’m just sharing my own due diligence and the methods I use when deciding which funds should be in my own investment portfolio. I believe that the U.S. Mid Cap Value asset class is an excellent place to invest part of a worldwide equity portfolio. If you want this asset class in your portfolio, I recommend any of the top 4 ETFs presented in this article. Please note that RWK only trades about 12,000 shares per day. This doesn’t bother me at all, but it is an important detail to some folks. Also note that DON pays its dividends monthly. I don’t invest specifically for dividends, but this too could be important information for some investors.
Thank you for taking time to read this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: We own shares of DON and intend to buy more shares in the future. I am not a professional investment advisor. Please perform your own due diligence or seek assistance from a Registered Investment Advisor prior to investing in any fund mentioned in this article.