The U.S. market was off to a decent start in the second half of this year, with the S&P 500 index even touching the 2,000 mark for the first time in August. Since then, the U.S. indices have remained sturdy on an improving economy, solid jobs data and growing investor confidence.
Some concerns about the wrap-up of the Fed stimulus and rising rate concerns caused occasional disturbances in the rally, but it appears that the longer-term bullish trend for stocks is still intact. Meanwhile, the Fed has announced it stopped its six-year long QE program in October and speculations about rising rates are rife at the current level.
As a result, concerns have started building up over the recent surge and some market analysts have been warning about the possibility of a correction in the coming weeks. Also, sluggish global markets reinforced such fears.
This could happen, as valuations appear rich at current levels and earnings growth seems to be driven by cost cutting rather than revenue growth. So far in Q3, earnings beat ratios are moderately higher than the recent levels while revenue beat rates have been on the weaker side.
In such a scenario, while a broad play on the U.S. equity markets can certainly give investors exposure to a winning trend as this economy seems more stable than any other developed economy, a more targeted play could be warranted by looking at the often overlooked mid cap ETF space.
Mid cap value ETFs are ideal for investors seeking equity appreciation with a lower level of risk. Relatively smaller companies have a history of bouncing back faster than the larger ones in a bull market. But smaller capitalization is often blamed for high risk. On the other hand, large cap stocks, though stable, are much more vulnerable to foreign events.
Notably, at present, the Chinese economy is faltering, the Euro zone is mulling over stimulus plans to combat deflationary worries and Japan has also announced a fresh round of monetary assistance to spark off economic growth.
Given this situation, a middle-of-the-road approach should help in meeting investors’ needs. Mid caps are arguably safer options for considerable growth, with lesser risk than their small-cap counterparts.
Further, investors may want to consider cycling into mid caps in order to obtain a nice momentum play as we move toward the New Year. While looking at individual companies is certainly an option, a focus on top ranked mid cap ETFs could be a less risky way to tap into the same broad trends.
Top Ranked Mid Cap ETF in Focus
We have found a number of ETFs that have a top Zacks ETF Rank of 2 or ‘Buy’ in the mid cap space and are thus expected to outperform in the months to come. Below, we present three funds that we believe will be gainful choices to tap into the space (read: all the Top Ranked ETFs).
Vanguard Mid-Cap ETF (VO)
This underappreciated ETF looks to track the CRSP US Mid Cap Index. Holding 367 stocks in its basket, the fund puts only 6.5% of total assets in the top 10 firms. This gives it a nice balance across each security and prevents heavy concentration.
The top firm, Vertex Pharmaceuticals (VRTX), makes up for the largest allocation at 0.9%. In terms of sectors, financials and industrials take the top spot at less than one-fifth of the total each, followed by modest allocations to consumer services, consumer goods and technology.