Midcap ETFs Worth A Wager

8/17/2009


Through Aug. 11, the average midcap growth fund had returned 22.0% in 2009 — best among diversified U.S. stock funds. Midcap blend funds, up 21.5%, are a close second. For comparison, the S&P 500 Index returned 11.8% including dividends in the same period.

Most midcap growth funds have sizable positions in both technology and consumer-discretionary stocks — two of the best-performing sectors in 2009. Also, the typical midcap growth fund is underweight utility stocks — the worst-performing group.

Midcap growth funds have also benefited from strong market interest in stocks with earnings momentum. According to Morningstar, over the last five years, average annual earnings growth for companies in midcap growth portfolios was 13.1% — best among diversified U.S. stock funds. At 13.9%, projected long-term earnings growth is second only to the 15.7% of the average small-cap growth fund.

Another factor supporting midcap stocks is their strong showing in Quadrix®. Based on capitalization-weighted Overall scores for stocks in the S&P indexes, one-third of the assets in the S&P 400 MidCap Growth Index score above 80, with only 8% below 20. Less than one-quarter of the broader S&P 1500 Index and only 18% of the S&P 400 MidCap Value Index score above 80, and both indexes have at least 13% of assets in stocks scoring below 20.

Recommendations

The strong returns of midcap funds are likely to attract investors. Although jumping in late can lead to disappointment, midcap funds still represent a nice complement to a mostly large-stock portfolio.

The table below provides statistics on six promising midcap funds. All six are exchange-traded funds (ETFs), which offer certain advantages over traditional open-ended mutual funds, including continuous trading throughout the day and highly transparent portfolios. All six have at least one-third of assets in stocks that score above 80, and none has more than 10% of assets in stocks with Overall scores below 20. All six have superior average scores for Earnings Estimates and Performance. All six funds have sizable exposure to the technology and consumer-discretionary sectors. Among open-ended funds, our top midcap picks include Baron Asset ($41; BARAX) and Heartland Select Value ($22; HRSVX).

STANDOUT MIDCAP ETFS
– Total Return –
– Average Quadrix Score * –
——— % of Assets ———
———— Sector Exposure ————
ETF (Price; Ticker)
YTD
(%)
1
Year
(%)
Overall
Earns.
Ests.
Perfor-
mance
Overall
Above
90
(%)
Overall
Above
80
(%)
Overall
Below
20
(%)
Largest
Sector
% of
Assets
Average
Overall
Score *
First Trust Mid Cap Core
AlphaDEX ($23; FNX) †
30.1
(14.4)
66
55
54
17
33
4
Cons. Discret.
20
69
iShares Morningstar Mid
Growth ($65; JKH)
22.5
(27.2)
67
55
50
22
41
8
Technology
25
65
iShares Russell Midcap
Growth ($40; IWP)
27.3
(22.7)
67
57
53
22
38
7
Technology
22
57
iShares S&P MidCap 400
Growth ($68; IJK)
23.9
(20.3)
66
56
52
20
39
6
Cons. Discret.
21
67
Rydex S&P Midcap 400
Pure Growth ($50; RFG)
37.1
(9.0)
63
55
56
23
36
6
Cons. Discret.
29
73
Vanguard Mid-Cap Growth
($42; VOT)
23.6
(25.8)
68
55
51
20
42
7
Technology
24
62
* Percentile ranks, with 100 the best. Averages are based on capitalization weighting of fund holdings.   
† Blend fund — all others are growth.

 


FORECASTS FUND RECOMMENDATIONS
Through Aug. 11, our recommended Growth Portfolio has gained 18.0% this year, versus 13.5% for its benchmark portfolio and a gain of 11.8% for the S&P 500 Index. The Conservative Portfolio increased 14.0%, versus 11.0% for its benchmark.
— Year-to-Date —
—— % of Portfolio ——
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Baron Asset ($41; BARAX)
17.0
D
6
7
Dreyfus Small Cap Stock Index
($15; DISSX)
12.0
D
0
0
Fidelity Export & Multinational
($17; FEXPX)
20.8
B
6
8
Fidelity Leveraged Co. Stock
($20; FLVCX)
39.4
A
0
0
Heartland Select Value ($22; HRSVX)
19.3
C
5
9
Heartland Value Plus ($21; HRVIX)
12.7
D
7
8
Northern Small Cap Value
($11; NOSGX)
6.9
E
0
0
T. Rowe Price Int’l Discovery
($33; PRIDX)
36.6
A
5
7
T. Rowe Price New Horizons
($22; PRNHX)
24.8
B
6
8
Vanguard 500 Index ($92; VFINX)
11.9
C
7
7
Vanguard Dividend Growth ($12; VDIGX)
7.0
E
8
10
Vanguard Emerging Mkts. Stock Indx
($22; VEIEX)
49.1
B
0
5
Vanguard GNMA ($11; VFIIX)
3.1
B
6
0
Vanguard Inter.-Term Tax Exempt
($13; VWITX)
7.0
C
0
0
Vanguard International Value
($28; VTRIX)
20.2
B
8
9
Vanguard Short-Term Invest.-Grade
($10; VFSTX)
10.3
A
0
0
Vanguard Total Bond Mkt. Index
($10; VBMFX)
3.3
E
20
0
Vanguard Wellesley Income ($19; VWINX)
8.1
E
0
7
Vanguard Wellington ($27; VWELX)
11.3
D
9
10
Wells Fargo Advantage High Income
($7; STHYX)
24.0
E
7
5
* Rankings through Aug. 11 from Morningstar, comparing performance among funds with same objectives.A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. c Closed to new investors.

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