Mid-Cap ETFs Can Get a Weak Dollar Boost

MarketsETF Trends

It is often said that large-caps, many of which are multi-national firms generating significant portions of their revenue overseas, benefit from a weak dollar while smaller companies, due to their domestic focus, benefit from a stronger dollar.

Mid-caps should not be left out of the dollar conversation. 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 and provide more stable stock prices. Additionally, they are not so big that their size would slow down growth.

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Mid-cap exchange traded funds include the Schwab U.S. Mid-Cap ETF (NYSEArca: SCHM), Oppenheimer Mid Cap Revenue ETF (NYSEArca: RWK), iShares Core S&P Mid-Cap ETF (NYSEArca: IJH), SPDR Mid-Cap 400 (NYSEArca: MDY) and the Vanguard Mid-Cap ETF (NYSEArca: VO).

RWK selects components from the broad basket of S&P MidCap 400 stocks but reweights holdings based on each company’s revenue, producing a portfolio that could potentially provide a better representation of companies’ economic contribution to the benchmark index. When comparing RWK to the benchmark S&P MidCap 400, the revenue-weighted ETF takes a greater tilt toward small-capitalization stocks and leans toward the value category. The ETF has a 0.39% expense ratio.

“The falling U.S. dollar helps U.S. equities but mid-caps benefit most,” said S&P Dow Jones Indices. “For every 1% drop in the U.S. dollar, the S&P MidCap 400 (TR) rises 3.20% on average. This is more than the 2.63% on average from the S&P 500 (TR) and 2.96% from the S&P SmallCap 600 (TR).”

The mid-caps segment has also outperformed their large-cap 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.

Middle capitalization stocks, or sometimes referred to as the market’s sweet spot, could help investors achieve improved risk-adjusted returns. 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 and provide more stable stock prices. Additionally, they are not so big that their size would slow down growth.

“The mid-caps are well positioned to grow international revenues with a falling dollar if they are on the cusp of expanding globally and need a catalyst,” according to S&P Dow Jones. “While the large caps can benefit from the falling dollar, it is likely the mid-caps can capture more new business with the global growth opportunity.  Mid-caps are also positioned generally better than small-caps for international business due to their greater size and resources.”

For more information on mid-caps, visit our mid-cap category.

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