- Possibly the best performing broadly diversified equity asset class in the world…
- U.S. Mid Cap Blend stocks have outperformed the S&P 500 by 1.75% CAGR (compounded annual growth rate) over the last 46 years
- The oldest U.S. Mid Cap Blend ETF has outperformed the S&P 500 BY 2.03% CAGR over the last 22 years
- Most ETFs in this asset class offer massive diversification in size of companies, sector exposure and value & growth
- The middle of the market is where the action is
Large Cap Blend vs Mid Cap Blend vs Small Cap Blend: 1972 thru 2018
Source: Portfolio Visualizer
If I had to pick a single asset class to invest in long-term it would certainly be the U.S. Mid Cap Blend asset class. This asset class has simply been a superior performer. Over the last 46 years, Mid Cap Blend indexes have outperformed Large Cap Blend indexes by 1.75% CAGR. A $10,000 investment in a Mid Cap Blend fund would have produced over $1,000,000 more in returns than if it were invested in a Large Cap blend fund.
What is a Mid-Cap Blend fund? Morningstar definition: “Mid-Cap Blend – The typical mid-cap blend portfolio invests in U.S. stocks of various sizes and styles, giving it a middle-of-the-road profile. Most shy away from high-priced growth stocks but aren’t so price conscious that they land in value territory. The U.S. mid-cap range for market capitalization typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market. The blend style is assigned to portfolios where neither growth nor value characteristics predominate.”
Not only does this asset class outperform, most of the available Mid Cap Blend ETFs offer massive diversification. These funds offer stocks from every industry sector of the market. They also include value and growth stocks. Additionally, with company sizes from $1 billion to $8 billion there is a large swath of American companies in most of these funds. The average fund in this category has 568 companies it.
Another benefit to holding these types of funds is that the middle of the market is where a great deal of the action is. The stocks represented in this category are growing and shrinking and therefore moving into and out of this asset class. The growing companies sometimes grow out of this index and move on to a large cap fund and leave behind plenty of capital that is then used to buy smaller companies that are growing into the mid cap indexes. Companies that are shrinking usually will fall out of the mid cap index which can reduce large losses from companies that may eventually face bankruptcy. The middle of the market is a very active and lucrative place to invest.
MDY vs S&P 500: September 1995 thru February 2018
Source: Portfolio Visualizer
The oldest available U.S. Mid Cap Blend ETF available is the SPDR® S&P MIDCAP 400® ETF (MDY). This ETF has an excellent 22-year track record. MDY has outperformed an S&P 500 index fund by 1.98% CAGR. A $10,000 investment in MDY in 1995 would have produced $36,000 more in returns than the S&P 500 fund if held until 2018.
Utilizing ETF screeners at Morningstar, TD Ameritrade and ETFdb.com I was able to find 15 U.S. Mid Cap Blend ETFs that have existed for 10 years or longer. I have compared each of these funds head-to-head with the back-testing tools available at Portfolio Visualizer. It would be easier to just go with the 10-year returns, but I like to see how these funds have done since their inception. Here are some pertinent details on each fund and the DVETF.com ranking:
Source: Morningstar
EZM vs CZA vs NFO vs IJH: May 2007 thru January 2018
Source: Portfolio Visualizer
If you are looking for a great performing U.S. Mid Cap Blend ETF, I believe you will do well to pick any of the top ten funds listed. But, I am convinced you can potentially squeak out another 0.5% in CAGR, long-term, by choosing one of the top four ETFs. To better understand why the top 4 funds have performed so well, let’s look at their fund descriptions and objectives (Source: fund family websites):
- EZM – Fund Overview: The WisdomTree U.S. MidCap Earnings Fund seeks to track the investment results of earnings-generating mid-cap companies in the U.S. equity market. Index Description: The WisdomTree U.S. MidCap Earnings Index is a fundamentally weighted index that measures the performance of earnings-generating companies within the mid-capitalization segment of the U.S. Stock Market.
- CZA – Investment Objective: Guggenheim Mid-Cap Core ETF (CZA) seeks investment results that correspond generally to the performance, before the fund’s fees and expenses, of the Zacks Mid-Cap Core Index. Index Description: The Zacks Mid-Cap Core Index uses quantitative methodologies to identify a group of securities that have the potential to outperform indices such as the Russell Midcap Index or the S&P MidCap 400 Index, from a universe of mid-capitalization securities, including master limited partnerships (“MLPs”) and American depositary receipts (ADRs”). Fund Highlights: Seeks to provide exposure to companies with a superior risk-return profile as determined by Zacks Investment Research, Inc. Rebalanced quarterly to assure timely stock selections.
- NFO – Investment Objective: Guggenheim Insider Sentiment ETF (NFO) seeks investment results that correspond generally to the performance, before the fund’s fees and expenses, of the Nasdaq US Insider Sentiment Index. Index Description: The Nasdaq US Insider Sentiment Index is designed to provide exposure to U.S. companies within the Nasdaq US Large Mid Cap Index (which consists of approximately 900 stocks) which exhibit high degrees of corporate insider buying. The universe of securities is screened by a series of three factors—increase in average shares held by corporate insiders, and a combination of positive share price momentum and lower share price volatility. The 100 highest-ranking securities, subject to industry weight constraints, are selected for inclusion in the Index and an equal weighting methodology is applied. Fund Highlights: Corporate Insider Insights. Seeks to provide exposure to companies with a high degree of corporate insider buying. Multi-Factor Approach. Adds momentum and volatility to an insider buying screen to identify companies with attractive share price characteristics. Equal Weighted. Provides equal weight exposure to all stocks in the index, which may result in a more balanced and diversified portfolio.
- IJH – The iShares Core S&P Mid-Cap ETF seeks to track the investment results of an index composed of mid-capitalization U.S. equities. Why IJH? Exposure to U.S. mid-cap stocks. Low cost and tax efficient. Use at the core of your portfolio to seek long-term growth
I tell investors to do their own due diligence when selecting funds for their portfolios. But, between the top 4 performers, I would highly recommend either EZM or IJH. NFO is too subjective for my tastes and it’s trading volume is below 3,000 shares per day. CZA is a good performer, but it is bordering on the edge of being an actively managed fund with a turnover rate of 181% per year. I like the expense ratio and low turnover rate of IJH, and the fact that it tracks the S&P 400 Mid Cap index rather than the Russell Mid-Cap index.
Why EZM is my favorite fund I own. EZM’s index methodology is based on earnings. “Earnings are the mother’s milk of stock prices.” (Larry Kudlow) EZM has nearly as many stocks in it as a Russell Mid Cap index fund but performs much better. I’ve been investing in and tracking EZM for several years and it has consistently outperformed all other Mid Cap Blend funds on a long-term basis. Although EZM is considered a ‘smart beta’ fund, it remains tax efficient and profitable in either a retirement or a taxable account with low capital appreciation payouts and a relatively low turnover rate of 42%. I would not recommend investing in just one fund, but if I could only pick one fund to invest in long-term it would certainly be the WisdomTree U.S. MidCap Earnings Fund (EZM).
Disclosure: I currently own shares of EZM and intend to accumulate more shares of EZM in the future. I am not a financial advisor. Please perform your own due diligence or seek advice from a registered investment advisor prior to investing in any fund mentioned in this article.
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Very respectfully, Micah McDonald, aka the Deep Value ETF Accumulator