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Smaller stocks, including mid-caps, are participating in this year's broader market rally. While near-term performance is often seductive, investors should remember the long-term potency of mid-cap stocks and exchange traded funds.
Add the layers of dividends and value to the equation, and mid-caps become all the more compelling.
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What Happened
The WisdomTree U.S. MidCap Dividend Fund (NYSE:DON), the king among mid-cap dividend ETFs, offers value factor exposure in addition to its dividend overlay. DON's dividend yield of 2.5 percent is well above the 1.36 percent found on the S&P MidCap 400 Index — but the value theme is potentially more compelling.
“Mid-cap value has been one of the most consistently performing asset classes over the last 25 years,” WisdomTree said in a note out Thursday.
“Despite the relentless underperformance of the value factor since the mid-2000s, mid-cap value has held up much better than its large- and small-cap counterparts. In fact, mid-cap value has beaten the S&P 500 Index on 63 percent of all rolling three-year periods, 76 percent of rolling five-year periods, 97 percent of rolling 10-year periods and on every single rolling 15- and 20-year period.”
Why It's Important
DON does have way of beating alternative mid-cap strategies.
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In the six years spanning 2013 through 2018, DON beat the S&P MidCap 400 in four of those years, and in one of the two years the mid-cap benchmark beat DON, it was by just a tenth of a percent.
The $3.49-billion DON holds just over 400 stocks. As a mid-cap value fund, DON's sector weights differ from those found in large-cap value plays. Many large-cap value funds feature significant allocations to financial services or energy stocks or both. Those sectors combine for just 17.14 percent of DON's weight.
Nearly 20 percent of DON's weight is allocated to consumer discretionary stocks, which is often a trait of growth strategies.
Importantly, dividends can provide a buffer against volatility. Over the past three years, DON's largest drawdown was 19.2 percent, or 400 basis points less than the S&P MidCap 400.
What's Next
Past performance is never a guarantee of future returns, but DON's long-term track record is impressive.
“Following another strong year relative to its benchmark, DON is in the top quartile of its Morningstar Mid-Cap Value peer group on all time frames. This includes the latest five- and 10-year periods in which DON is in the first percentile of all mid-cap value funds,” according to WisdomTree.
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Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.