Here's Why You Should Buy Top-Ranked Mid-Cap ETFs Now

After the longest winning streak in nearly two decades, the S&P 500 was again caught in volatile trading. While signs of trade negotiations with China are boosting optimism, the escalation in Trump’s tariffs increases the volatility in the stock market (read: Can S&P 500 ETFs Continue Their Winning Streak?). 
 
In such a scenario, mid-cap investing can be a strong option, offering a unique balance between growth and stability, diversification benefits and potential for undervalued opportunities. While there are several ETF choices available in the mid-cap space, we have highlighted some that currently boast a Zacks ETF Rank #2 (Buy), suggesting their outperformance in the months ahead. 

Some of these include Vanguard Mid-Cap ETF VO, SPDR Portfolio S&P 400 Mid Cap ETF SPMD, Vanguard S&P Mid-Cap 400 ETF IVOO, Vanguard Mid-Cap Value ETF VOE and iShares Russell Mid-Cap Value ETF IWS.

Trade Gyrations

In the latest escalation, Trump announced a 100% tariff on movies produced outside the United States. He further signaled tariffs on pharmaceuticals over the next two weeks, aimed at reducing regulatory hurdles for pharmaceutical manufacturing in the United States. However, several reports suggest that the United States and China are willing to negotiate on tariffs and put an end to the trade conflict. 

Trump has announced potential trade deals with India, South Korea and Japan, aiming to convert his tariff policy into trade agreements. He also announced that top U.S. officials would meet with their Chinese counterparts this weekend to discuss trade. The meeting would be the first major talks between the countries since Trump raised tariffs on imports from China to 145% last month.

Geopolitical Tensions

Renewed conflict between India and Pakistan could take a toll on the stocks if it turns into a major war. 

Mixed Economic Indicators

The U.S. economy contracted in the first quarter for the first time in three years, largely due to a significant surge in pre-tariff imports. GDP declined at an annualized rate of 0.3% during the first three months, more than the 0.2% decline expected by economists surveyed by Bloomberg. U.S. manufacturing activity shrank the most since November in April, while consumer confidence hit a five-year low. The decline was due to tumbling consumers’ expectations related to business conditions, employment prospects and future income, reflecting pessimism about the economy (read: Is Weak Consumer Sentiment Hurting Discretionary ETFs?). 

Nevertheless, April jobs data showed that the U.S. labor market remained resilient amid the tariff chaos. The economy added better-than-expected 177,000 jobs while the unemployment rate held steady at 4.2%, providing further assurance about the economy's health.

Why Mid-Caps?

Large-cap stocks tend to be household names with established businesses, while small-cap stocks offer the excitement of undiscovered opportunities. Mid-cap stocks occupy a unique position in the market, combining the stability of large-cap stocks with the growth potential of small-cap ones. 

Mid-cap companies occupy a sweet spot in the market, as they have typically outgrown their small-cap counterparts and proven their business models but have not yet reached the size and maturity of large-cap companies. This transitional stage often results in higher growth rates and attractive risk-return characteristics (read: Don't Sell in May and Go Away: Follow These ETF Strategies). 

Including mid-cap stocks in a portfolio can provide valuable diversification benefits, as they often exhibit different risk-return characteristics compared to large-cap and small-cap stocks. This diversification can help reduce the overall risk of a portfolio, particularly during periods of market volatility, by spreading investments across various market segments that may be impacted differently by market fluctuations.

As a result, mid-cap stocks often exhibit greater growth potential than large caps while providing more stability than small-cap stocks.

ETF Picks

Vanguard Mid-Cap ETF (VO)

Vanguard Mid-Cap ETF tracks the CRSP US Mid-Cap Index. It holds 307 stocks with a well-diversified portfolio, with each firm holding no more than 1.1% of the total assets. Vanguard Mid-Cap ETF has key holdings in industrials, financials, consumer discretionary and technology. With AUM of $76.4 billion, Vanguard Mid-Cap ETF charges investors 4 bps in fees per year.

SPDR Portfolio S&P 400 Mid Cap ETF (SPMD)

SPDR Portfolio S&P 400 Mid Cap ETF tracks the S&P MidCap 400 Index and holds 401 stocks in its basket, with each accounting for no more than 1% share. Industrials, financials and consumer discretionary are the top three sectors with a double-digit allocation each. SPDR Portfolio S&P 400 Mid Cap ETF has accumulated $11.8 billion in its asset base and charges 3 bps in annual fees.

Vanguard S&P Mid-Cap 400 ETF (IVOO) 

Vanguard S&P Mid-Cap 400 ETF offers exposure to broad mid-capitalization stocks. It follows the S&P MidCap 400 Index, holding 401 securities with none accounting for more than 0.7% share. Industrials, financials and consumer discretionary are the top three sectors with double-digit exposure each. Vanguard S&P Mid-Cap 400 ETF has managed $2.5 billion in its asset base and charges 7 bps in annual fees.

Vanguard Mid-Cap Value ETF (VOE)

Vanguard Mid-Cap Value ETF follows the CRSP US Mid Cap Value Index, which measures the investment return of mid-capitalization value stocks. It holds 186 stocks in its basket, with each accounting for less than 2% of the assets. Industrials, financials, utilities and consumer staples are the top four sectors with double-digit exposure each. Vanguard Mid-Cap Value ETF has amassed $17 billion and charges 7 bps in fees per year. 

iShares Russell Mid-Cap Value ETF (IWS) 

iShares Russell Mid-Cap Value ETF offers exposure to mid-capitalization U.S. equities that exhibit value characteristics. It follows the Russell MidCap Value Index and holds 711 stocks in its basket. With AUM of $13 billion, IWS has key holdings in financials, industrials, and real estate that account for double-digit exposure each. It charges investors 23 bps in annual fees.

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This article originally published on Zacks Investment Research (zacks.com).

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