Market Overview

An Interesting Opportunity Is Brewing With Mid-Cap ETFs

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An Interesting Opportunity Is Brewing With Mid-Cap ETFs

Among the many asset classes that performed well in the first quarter were mid-cap stocks. In the first three months of the year, the S&P MidCap 400 Index returned 14.8 percent, beating the S&P 500 by 140 basis points.

What Happened

While traditional mid-cap exchange traded funds topped large-cap rivals in the first quarter, the really impressive returns were delivered by mid-cap growth funds.

“The often overlooked and under-allocated mid-cap growth fund category cranked out one of its rare high notes during the first three months of 2019, with an 18.4% return that beat the eight other equity style boxes,” according to InvestmentNews.

Why It's Important

The recent outperformance of mid-cap growth stocks highlights an interesting scenario with two mid-cap growth ETFs: the iShares S&P Mid-Cap 400 Growth ETF (NYSE: IJK) and the Invesco S&P MidCap 400 Pure Growth ETF (NYSE: RFG). IJK and RFG gained 15.9 percent and 15.6 percent, respectively, in the first quarter.

While the names of those ETFs imply some similarities, their underlying indexes are much different. The $7.64 billion IJK tracks the S&P 400 MidCap Growth Index while the $500.30 million RFG follows the S&P MidCap 400 Pure Growth Index.

In RFG's index, "growth is measured by the following risk factors: sales growth, earnings change to price and momentum," according to Invesco.

What's Next

Some market observers see attractive opportunity between the two mid-cap growth ETFs.

"IJK has similar EPS growth estimates for 2019 and 2020 as the iShares S&P 500 Growth ETF (NYSE: IVW) despite materially lower valuations," according to ETF Action. "RFG estimates are in a league of their own, but trade with similar multiples (likely because of lower trailing growth. If estimates hold, we expect RFG to outperform in the short to mid-term."

As ETF Action notes, sometimes these anomalies are attributable to sector-level differences. IJK three largest sector weights, in order, are technology, health care and industrials with that group combining for about half the fund's weight. RFG's top three sectors weights, in order, are health care, consumer discretionary and technology with that trio combining for over 51 percent of the Invesco ETF's roster.

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