I am mostly a value investor. Part of the reason is that I got hurt, along with everyone else, investing in the go-go growth stocks of the late 1990s. That has made me pick and choose growth stocks very carefully.
Value stocks have generally outperformed growth stocks over the long term, because they begin at a place where they have to catch up to just reach fair value. Mid-cap stocks also have further to run than large caps.
Here are my choices for mid-cap value ETFs for the average Joe investor, aggressive investor and conservative investor.
I think the WisdomTree family of ETFs is a very strong fund family to start with, and the WisdomTree MidCap Earnings Fund (NYSEArca: EZM) is an ETF I’m very fond of for conservative investors. I like its very low expense ratio of 0.38%, which is effectively covered by its 1.06% yield.
I think of it as a quasi-mechancial model. It takes companies in the top 75% of the market capitalization of the WisdomTree Earnings Index, removes the top 500 largest companies, and is earnings-weighted in December of each year. Thus, companies with greater earnings generally have larger weight in the index. So it isn’t just blindly cap-weighted.
The fund holds 621 stocks. The top 10 account for about 6% of the total asset base, and this speaks to its broad diversification.
The top holdings tend to rotate quite a bit. Right now, the top three are Discovery Communications (NASDAQ: DISCA), Santander Consumer USA Holdings (NYSE: SC) and Brunswick Corp. (NYSE: BC).
It has 23% of assets invested in financials, 14% in industrials, 11% in tech, 6% in utilities, 5% in retail and 5% in energy.
For aggressive investors, I’m not about to abandon this great fund family, so I chose the WisdomTree MidCap Dividend Fund (NYSEArca: DON). The approach is somewhat similar to the previous fund. The fund holds the companies that compose the top 75% of the market capitalization of the WisdomTree Dividend Index after the 300 largest companies have been removed. The index is dividend-weighted annually to reflect what each company is expected to pay in the coming year.
The dividend yield isn’t huge at 3.06%, but it’s nothing to scoff at and covers the 0.38% expense ratio.
The fund’s assets are also nicely diversified with 403 stocks. The top 10 holdings are about 10% of the total asset base.
The top components also tend to rotate a good deal. The biggest holdings now are Diamond Offshore Drilling (NYSE: DO), Mattel Inc. (NASDAQ: MAT) and Coach (NYSE: COH).
If you’re an average Joe investor, then take a look at PowerShares Russell Midcap Pure Value Portfolio (NYSE: PXMV). Be alert that up until May 22 the fund was known as PowerShares Fundamental Pure Mid Cap Value Portfolio. The strategy of the fund may also change, but I hope not, because there’s a degree of active management you don’t often get with ETFs.