ETFs 101
Exchange-traded funds, or ETFs, are investment funds that are listed on a securities exchange and provide exposure to a range of shares or assets with a single purchase. ETFs can be ‘managed funds’ or ‘index funds’, or in other words, active or passive.
The Rask Finance video below explains index funds:
Mid-Cap vs. Large-Cap
To make this comparison, let’s look at two ETFs: the iShares S&P Mid-Cap ETF and the iShares S&P 500 ETF (ASX: IVV), which I’ve previously written about here.
Market Capitalisation
The S&P 500 ETF invests in the 500 largest US companies by market capitalisation. Currently, its top holdings include Microsoft, Apple, Amazon and Facebook.
In contrast, the Mid-Cap ETF invests in 400 companies which, at 31st March 2019, had market capitalisations between US$2.4 billion and US$8.2 billion.
Sector Investments
In terms of sector exposure, the S&P 500 ETF invests heavily in information technology (22%), health care (14%), financials (13%) and communication (10%), while the Mid-Cap ETF’s top sectors are financials (16%), industrials (16%), and information technology (15%). One of the major differences is that nearly 11% of the Mid-Cap ETF is invested in real estate, compared to roughly 3% of the S&P 500.
The Mid-Cap ETF appears to invest in companies with lower valuations, with an average price-earnings (P/E) ratio of 19.09 times and a price-to-book (P/B) ratio of 2.18 times. This is compared to the S&P 500 ETF P/E of 20.82 times and P/B of 3.32 times. However, this difference may simply be due to the different industries the two ETFs invest in.
Performance
Over the last 10 years, the Mid-Cap ETF has returned 15.26% per year, marginally below the 15.89% return from the S&P 500 ETF. However, both funds were started in 2000 within a week of each other, and since then the Mid-Cap ETF has returned 8.01% per year compared to 4.78% per year for the S&P 500 ETF.
Dividends
The S&P 500 ETF pays slightly higher dividends, with a trailing yield of 1.64% compared to the Mid-Cap’s 1.22%.
Fees & Risks
Both ETFs have the same low management fee of 0.07%.
The Mid-Cap ETF may be more exposed to downturns and has only returned 0.1% over the last year compared to 10% for the S&P 500 ETF. Larger companies, as a general rule of thumb, tend to be less volatile.
While you could argue that the S&P 500 ETF has better diversification benefits, the difference between 400 and 500 companies is negligible and both are diversified across industries.
My Take
Although the last year has been slow, the Mid-Cap ETF is a compelling option and has performed much better over a 19-year period. If stability and dividends are what you’re looking for, the S&P 500 ETF might be more appropriate, while the Mid-Cap ETF might have slightly better growth prospects.
For our number one ETF pick, check out the free report below.
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Disclosure: At the time of writing, Max owns shares in the iShares S&P 500 ETF (ASX: IVV).
