Top Mid-Cap Value ETFs

Studies routinely show that investors who simply buy the cheapest stocks (determined by virtually any metric), as well as the smallest stocks by market value, tend to outperform the stock market average. With that in mind, consider these three mid-cap value exchange-traded funds below, which boast strong historical returns helped by low fees, higher yields, and diversified portfolios made up of stocks that meet basic "value" parameters.

The most diverse mid-cap value ETF

The iShares Russell Mid-Cap Value ETF uses a simple rules-based methodology to pick the best mid-cap value stocks from a universe that includes the 800 smallest stocks of the Russell 1000 Index. The market cap-weighted fund selects stocks based on price-to-book ratios, projected growth (I/B/E/S estimates), and historical sales growth, ultimately selecting fewer than 600 stocks from the 800 stocks in its universe of potential picks.

As is typical with value-oriented funds, the iShares Russell Mid-Cap Value ETF tends to overweight certain sectors like financial services (18% of assets), real estate (15% of assets), and utilities (10% of assets), which tend to trade at lower multiples than other sectors. And although the fund has a natural bias toward larger companies (which are given a heavier weighting in market cap-weighted funds), the largest companies in the index are far from household names.

Stocks owned by the ETF generally make up about 63% of the market value of the Russell Midcap Index, thus making it only modestly different from a simple mid-cap blend ETF. Over the most recent 15-year period, performance has been exceptional, as investors enjoyed returns of approximately 10.3% per year, putting it well ahead of about 83% of ETFs in the niche. For that level of performance, its annual expense ratio of 0.25% is easily justifiable.

The low-cost mid-cap value ETF

Vanguard's cost leadership in index funds extends into the world of market capitalization-based indexes, which includes its very popular Vanguard Mid-Cap Value ETF. The ETF selects stocks by ranking all stocks by market cap, and selecting from stocks, which are smaller than the largest 85% of companies by market cap but larger than the smallest 70% by market cap.

Stocks that make the "value" cut have to filter favorably through fundamental screens, which include price-to-book ratios, trailing and forward price to earnings, dividend yield, and price to sales. The cheapest stocks make the cut, resulting in a portfolio that is biased to consumer cyclicals (20% of assets), financials (20% of assets), and technology (12% of assets).

With about 200 holdings, it is the most concentrated of any fund on this list, which may be a disadvantage for investors who prefer funds with wider diversification. Furthermore, the fund has a shorter operating history, but performance has been strong since inception. It ranks in the top 15% of mid-cap value funds over the most recent 10-year period, beating the category average by about 1.4% per year. Low expenses are a primary driver of performance, as investors pay just 0.07% per year to own the fund.

A "Smid-cap" value ETF

The iShares S&P Mid-Cap 400 Value ETF gets a spot on this list for offering a unique portfolio that goes further down into small-cap territory with companies that are half the size of its competitors.

Like the others on this list, the iShares S&P Mid-Cap 400 Value ETF uses a value framework to select stocks from a larger index. The underlying index gives value scores to stocks that make up the S&P MidCap 400 index based on price-to-book, price-to-sales, and price-to-earnings ratios. Ultimately, it picks about 70% of stocks in the S&P MidCap 400 index for the value-oriented ETF, resulting in about 280 stocks in its portfolio.

Like the funds above, this ETF has a bias toward slow-growing financials (20% of assets), which it marries with beefy positions in industrials (14% of assets) and technology stocks (12% of assets).

The big difference maker is the fund's willingness to invest in smaller companies. Its average holding had a market cap of approximately $4.2 billion, compared to an average of roughly $11 billion for the Russell fund and $12 billion for the Vanguard fund.

Over the most recent 15-year period, it outperformed the mid-cap category average by 1% per year, putting it in the top 20% of mid-cap value funds. Its edge was smaller compared to the small cap value category, which it outperformed by 0.4% per year over the same 15-year period. Given an annual expense ratio of just 0.25% per year, it may be a best fit for those who want a mid-cap fund that ventures into small-cap territory.

Mid-cap value ETFs for every need

Each mid-cap value ETF on this list offers something different. For broad diversification, look no further than the iShares Russell Mid-Cap Value ETF, which has twice the number of holdings as the Vanguard fund and three times the number of holdings as the competing S&P 400 MidCap tracker.

When it comes to expenses, the Vanguard Mid-Cap Value ETF is the best pick, given that the competing funds on this list have annual expense ratios that are nearly four times larger than Vanguard's low-cost leader. Finally, the iShares S&P Mid-Cap 400 Value ETF is the best pick for those who want exposure to truly tiny companies, as it effectively blends the traditional definition of small- and mid-cap stocks with a portfolio that is more heavily weighted toward small caps than mid caps that make up the majority of the other two ETFs by assets.

To be sure, any of the above could be a very good pick, if only because they are all certifiably cheap. According to recent data from the Investment Company Institute, the average actively managed mutual fund carried an expense ratio of 0.82%, more than three times higher than the expenses levied on the highest-cost funds on this list and nearly 12 times higher than Vanguard's Mid-Cap Value ETF.

While there are few guarantees in investing, it is mathematical certainty that the lowest-cost funds have the best probability of outperforming. These low-cost ETFs thus offer a great way to add mid-cap value stocks to your portfolio with minimal costs.

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.