Mid Cap ETF Investing 101 (MDY, IWR, VO, IWP, IWS)

Eric Dutram: Although investors have seen some level of weakness in the markets to open up the second quarter, many still remain broadly optimistic over a recovery this year. Oil prices are remaining stable around the $100/bbl. level while job growth—although weak in the most recent month—is still trending in the right direction.

Additionally, stocks have broadly surged higher in 2012 with all the major benchmarks adding close to double-digits in the first quarter of the year. Thanks to this and the low yields in the bond and money markets, equities are probably still a good bet for most investors at this time (read For Japan ETFs, Think Small Caps).

While a broad play on the equity markets can certainly give investors exposure to this trend, a more targeted play could be warranted by looking at the often overlooked mid cap ETF space. Generally, investors will focus in on large and small cap stocks—looking to large companies for stability and smaller ones for growth—leaving mid caps forgotten by many.

This is unfortunate as mid cap ETFs can offer up the best of both worlds, allowing for both growth and stability in many portfolios. Furthermore, the space has been a solid performer when looking from the long-term; mid caps are outperforming both their small and large cap counterparts when looking at both the year-to-date and five year time frames (see Brazil Small Cap ETF Showdown).  

Given this solid history of outperformance, investors shouldn’t forget about this space and may want to consider an allocation to the market cap level via any number of the mid cap ETFs that are currently on the market today. While there a few quality options, any of these five popular mid cap ETFs will likely make for great choices for those looking to access the space from a broad perspective:


This ETF is easily the most popular mid cap ETF from a volume perspective as the fund trades more than three million shares a day, nearly triple the next fund in the space. The fund also has close to $10 billion in AUM while charging investors 25 basis points a year in fees.

In terms of sector exposure, industrials and tech are the top two segments, accounting for 17% and 16%, respectively, while the top five is rounded out by consumer discretionary, financials, and health care. In total, the fund holds 400 securities in its basket, and doesn’t put more than 0.85% in any one security, suggesting an absence of company specific risk (see more on ETFs at the Zacks ETF Center).

iShares Russell Midcap Index Fund (NYSEARCA:IWR)

This popular mid cap ETF has some similarities with MDY but this fund has a slightly lower expense ratio (0.21%) and pays a decent yield of 1.4% to investors. Additionally, the fund tracks the Russell Midcap Index, which is a cap weighted benchmark that consists of 800 of the smallest firms in the Russell 1000, giving it a wider disruption of holdings.

This strategy results in a fund that has a significant interest in large and small cap securities as these companies make up roughly 47% of the total assets. From a sector perspective, consumer discretionary takes the top spot at 16% while it is closely trailed by tech (14%), and industrials (13%). The ETF holds 784 securities in its basket and allocates just 4.6% of its assets to the top ten holdings (read Three Overlooked Emerging Market ETFs).

Vanguard Mid-Cap Index Fund (NYSEARCA:VO)

If investors value low expenses above all else, VO will be tough to beat in the mid cap ETF segment. The ETF charges just 12 basis points a year for its services, tracking the MSCI US Mid Cap 450 Index. This benchmark has a heavy focus on securities in the mid cap segment and is well dispersed among value and growth styles.

Sector wise, the product has the biggest allocations to consumer discretionary and tech, as these two make up 18% and 16%, respectively. In terms of small allocations to industries, the fund has hardly anything in telecom and just 5% in consumer staples. Additionally, like other ETFs on this list, VO doesn’t have much of a problem in terms of company specific risk; the ETF holds more than 450 securities and puts just 5.6% of its assets in the top 10 holdings.

iShares Russell Midcap Growth Index Fund (NYSEARCA:IWP)

For investors looking for a targeted play on growth stocks in the mid cap ETF world, IWP could be a way to go. The fund tracks the Russell Midcap Growth Index which is a benchmark that has a heavy focus on growth stocks, putting just 5% of its portfolio in value companies and just 20% in blend firms. However, in terms of capitalization levels the product does have nearly 45% of the fund outside the mid cap space (read Frontier Market ETF Investing 101).

In terms of sector exposure, nearly 40% of the fund is allocated to consumer discretionary and tech firms, while the portfolio is light on telecom and real estate companies. In total, the mid cap ETF holds 467 stocks in its basket and puts just 8.5% of its assets in the top ten holdings.  

iShares Russell Midcap Value Index Fund (NYSEARCA:IWS)

If value investing is more of your style in the mid cap ETF space, IWS could be an intriguing choice. The ETF follows the Russell Midcap Value Index which is a benchmark of stocks that have value characteristics. In fact, just 3% of the fund’s assets are classified as growth while just 18% are classified as blend.

For sectors, traditional value havens such as financials (20%) and utilities (14%) take the top spots while telecom and basic materials occupy the other end of the spectrum. The ETF charges 26 basis points a year in fees but puts out a yield of about 2% a year. In total, IWS has about 530 securities and allocates just 8.2% to the top ten holdings, suggesting once again that company specific risk isn’t much of a problem in this fund either.

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Written By Eric Dutram From Zacks Investment Research

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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