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Get in the Middle With Marvelous Multi-Factor ETF

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Mid-cap stocks and ETFs were solid performers in 2019. Investors looking to step up their mid-cap exposure in 2020 while putting factors to work in their portfolios may want to consider the John Hancock Multifactor Mid Cap ETF (NYSEArca: JHMM).

JHMM employs a rules-based selection process that is seen as a multi-factor approach, combining a number of factors in a single portfolio. Securities are adjusted by relative price and profitability. The underlying indices may overweight stocks with lower relative prices and underweight names with higher relative prices. The indices can also adjust for profitability by overweighting stocks with higher profitability and underweighting those with lower profitability.

Over a long-term horizon, though, mid-caps have outshined the competition. Since 1996, the S&P MidCap 400 generated an average annual return of 10.4%, compared to 7.3% for the S&P 500 and 9.7% for the SmallCap 600.

Historical data indicate that even modest allocations to mid-cap stocks can improve long-term returns compared to portfolios that don’t feature mid-cap exposure.

Diverse Mid-Cap Companies

Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow, along with providing more stable stock prices. Additionally, they are not so big that their size would slow down growth. Increased mergers and acquisitions activity could be just what mid-caps need to catch up to large- and small-cap stocks.

The mid-cap category has also outperformed their larger peers, but with lower volatility than small caps. Moreover, the returns of mid-cap stocks have also beaten those of small-cap stocks during the trailing three-, five-, and 10-year periods, with lower volatility.

Heading into 2020, JHMM has caught the eyes of analysts.

“JHMM ends up with over 48% exposure to sectors that our analysts deem as overweights,” according to Bank of America Merrill Lynch. “Furthermore, JHMM still offers diversification across these overweight sectors to include industrials (at 16.03%), financials (at 14.91%), consumer discretionary (at 11.97%) and utilities (at 5.54%). The combination of high sector exposure and stock exposure helps JHMM secure a high fundamental score.”

JHMM is up almost 29% this year, putting it well ahead of traditional, cap-weighted mid-cap index funds.

For more information on middle capitalization stocks, visit our mid-cap category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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