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Midcap stock ETFs may be back in vogue, at least for some financial advisors.
Counter to the performance-chasing mentality that often drives individual investors, advisors say they are starting to look beyond the outperformance of the largest companies to better diversify client portfolios across the market-cap spectrum.
Part of this trend was illustrated during the first quarter when more than $1 billion flowed into the Invesco S&P Midcap Quality ETF (XMHQ) and the Invesco S&P Midcap 400 GARP ETF (GRPM).
But that trend, however strong, still remains deep in the shadows of the booming bull market for the largest companies leading the broad market indexes, including the S&P 500, which has been carried along by the so-called Magnificent Seven stocks.
Those seven companies—Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc.—represent 28% of the market-cap weighted S&P 500, and at the same time have contributed nearly 65% of the index’s performance over the past year.
“The extended large cap rally is pushing investors to seek ETFs that can offer diversification beyond the mega-cap growth names,” said Nick Kalivas, Head of Factor and Core Equity ETF Strategy at Atlanta-based Invesco Ltd. “This is a key attribute of mid-cap, where factor screening combines less expensive valuation down the market-cap spectrum and a forecasted improvement for potential investment opportunities.”
Performance wise, no advisor would be accused of chasing performance by moving down the market capitalization spectrum at this time.
Since the start of the year the iShares Core S&P Mid-Cap ETF (IJH), which tracks the S&P 400 Index, is up 8.2% and is up 21.4% over the past 12 months.
By comparison, the SPDR S&P 500 ETF Trust (SPY), is up 9.6% this year and gained 28.2% over the trailing 12 months.
Moving further down the market cap spectrum, the SPDR Portfolio S&P Small Cap ETF (SPSM), which tracks the S&P SmallCap Index, gained just 0.16% this year and 13.4% over the past 12 months.
Advisors see Promise in Midcaps
“At a high level, midcaps have historically been the secret sauce for asset managers in both large-cap and small-caps,” said Nicholas Codola, senior portfolio manager at Orion Advisor Solutions in Omaha, Nebraska.
According to Invesco’s Kalivas, earnings forecasts over the next two years also favor smaller-sized companies.
The consensus estimates for large-cap year-over-year earnings for 2024 is 12.5%. But that jumps to 20.5% for mid-cap stocks, and 29.8% for small caps.