In this article, we will take a look at the 10 best mid-cap growth ETFs to buy.
Around 20% of the total market capitalization of the US equity market is represented by mid-cap companies with a market cap between $2 billion and $15 billion. According to VettaFi, there are around 23 exchange-traded funds (ETFs) that can be considered as mid-cap growth ETFs with a combined asset under management (AUM) of $169.8 billion. The size of the ETF industry assets stood at $7.3 trillion at the end of the second quarter of 2023. Investors often consider mid-cap companies as an attractive investment option due to their potential for significant growth, which can surpass what large-cap and mega-cap corporations offer. Moreover, mid-cap companies typically maintain a more stable and secure business model compared to their smaller counterparts. According to the US Bureau of Labor Statistics (BLS), 30% of new businesses cease their operations within a brief period of two years from inception. This figure increases to 45% after five years and 65% after a decade. Historically, mid-cap companies have grown to become large-cap or mega-cap companies with a heavily defendable business model. Interestingly, mid-cap ETFs have not garnered as much attention as their large-cap and mega-cap counterparts and have observed a net outflow of $106 billion in the last five years. Furthermore, the number of mid-cap active funds saw a decline between 2003 and 2018 from 371 to 301. Meanwhile, the number of large-cap funds remained consistent at 816 during the same period.
According to S&P Dow Jones Indices, mid-cap stocks have received the lowest asset allocation historically, even lower than that allocated to the small-cap universe. Despite the prevailing beliefs and recent trends, data reveals that mid-cap stocks have actually outperformed both large-cap and small-cap stocks. Since December 1994, the S&P MidCap 400 has outperformed the S&P 500 by 2.03% and the S&P SmallCap 600 by 0.92% on an annualized basis. Some of the best mid-cap stocks, such as Vistra Corp. (NYSE:VST), and Bill.com Holdings, Inc. (NYSE:BILL), Antero Resources Corporation (NYSE:AR), are now attracting hedge fund attention. Here’s what TimesSquare Capital said about Antero Resources Corporation (NYSE:AR) in its Q3 2022 investor letter:
“New to the portfolio this quarter is Antero Resources Corporation (NYSE:AR), a natural gas focused exploration and production company with operations in Pennsylvania and Ohio. The continued buildout of U.S. liquefied natural gas stems from utility plants switching from coal to natural gas and European demand.”
Trends in Mid-Cap Funds and US Equity Market
In the short term, mid-cap funds have experienced a net outflow of funds, while the overall US equity market witnessed a net inflow of $9.7 billion during the week ending on September 13, as reported by LSEG. Experts believe that mid-cap companies are losing against large-cap corporations because mid-cap companies do not have the same level of opportunity to access low-cost labor markets outside the US by outsourcing their operations. Furthermore, they are not able to tap less regulated markets overseas. These factors act as a bottom-line booster for large-cap stocks. There is also a widespread belief that mega-cap and large-cap companies continue to outperform mid-cap companies during extended periods of slow economic growth. This is because large-cap companies can cut costs more effectively through restructuring and other efforts as compared to their mid-cap counterparts.
It must be noted that mid-cap companies are usually acquisition targets by large-cap companies. There have been numerous examples of mid-cap companies getting acquired by mega-cap or large-cap behemoths in the recent past. Microsoft Corporation (NASDAQ:MSFT), for instance, has been at the forefront of this strategy as it has completed several acquisitions in the last decade. The Redmond, Washington-based company completed the takeover of Skype Technologies for a sum of $8.5 billion in 2011. The acquisition aided Microsoft Corporation (NASDAQ:MSFT) in integrating live audio and video communications platforms into its operating system and gaming console. Similarly, the company completed the acquisition of ZeniMax Media in September 2020 for $8.1 billion to boost its gaming division. Furthermore, Microsoft Corporation (NASDAQ:MSFT) acquired the devices and services division of Nokia Oyj (NYSE:NOK) for $7.2 billion in September 2013 to double down on its bet on mobile devices. The Seattle, Washington-based technology conglomerate Amazon.com, Inc. (NASDAQ:AMZN) also implemented a similar strategy of boosting its digital content platform through the acquisition of Metro-Goldwyn-Mayer (MGM) for $8.50 billion in May 2021. The near-century-old studio had a content library that comprised over 4,000 film titles and 17,000 TV episodes.
Photo by Nicholas Cappello on Unsplash
Our Methodology
We have shortlisted the 10 best mid-cap growth ETFs for the long term on the basis of 5-year performance. All 10 mid-cap growth ETFs on our list were able to beat the performance of the broader S&P Mid-Cap 400 Index, which experienced a rise of 25.62% in the last five years. Among these ETFSs, Vanguard U.S. Momentum Factor ETF (CBOE:VFMO) stands out as the best Vanguard mid-cap growth ETF. The best mid-cap growth ETFs have been ranked in ascending order of their 5-year performance as of September 21.
Best Mid-Cap Growth ETFs
10. Alpha Architect U.S. Quantitative Momentum ETF (CBOE:QMOM)
5-Year Price Performance: 31.9%
Total Net Assets as of September 21, 2023: $197.58 million
Expense Ratio: 0.39%
Number of Holdings: 50
Alpha Architect U.S. Quantitative Momentum ETF (CBOE:QMOM) is an actively managed ETF that invests primarily in US mid-cap stocks, defined as companies with market caps between $1 billion and $15 billion. The fund selects stocks based on a rules-based quantitative momentum strategy. Momentum investing tends to favor growth stocks that are exhibiting strong recent price performance. The ETF selects 50 stocks based on 12-month and 6-month momentum, trading volume, and market capitalization. The portfolio is rebalanced and reconstituted quarterly.
9. First Trust Multi Cap Growth AlphaDEX Fund (NASDAQ:FAD)
5-Year Price Performance: 34.4%
Total Net Assets as of September 21, 2023: $174.34 million
Expense Ratio: 0.63%
Number of Holdings: 675
First Trust Multi Cap Growth AlphaDEX Fund (NASDAQ:FAD) invests in US stocks selected from the NASDAQ US 500 Large Cap, NASDAQ US 600 mid-cap, and NASDAQ US 700 small-cap indexes. Stocks are selected based on growth factors like 3-year EPS growth, price appreciation, and price-to-book value. First Trust Multi Cap Growth AlphaDEX Fund (NASDAQ:FAD) implements a multi-factor stock selection mechanism. The top 10 holdings of the ETF have a cumulative weight of 4.97%, which reflects less concentration at the top, like traditional cap-weighted ETFs. First Trust Multi Cap Growth AlphaDEX Fund (NASDAQ:FAD) has secured the ninth position on our list of the best mid-cap growth ETFs.
8. Etho Climate Leadership U.S. ETF (NYSEARCA:ETHO)
5-Year Price Performance: 35.6%
Total Net Assets as of September 21, 2023: $178.24 million
Expense Ratio: 0.45%
Number of Holdings: 261
Etho Climate Leadership U.S. ETF (NYSEARCA:ETHO) invests in US mid-cap stocks selected based on climate leadership criteria. The ETF tracks the Etho Climate Leadership Index. Companies are screened for ESG metrics, fossil fuel involvement, and other environmental factors. The index selects the top 100 climate leaders. Three of the top five holdings of Etho Climate Leadership U.S. ETF (NYSEARCA:ETHO) are mid-cap growth stocks in the form of Telephone and Data Systems, Inc. (NYSE:TDS), Advanced Drainage Systems, Inc. (NYSE:WMS), and Lennox International Inc. (NYSE:LII).
The London Company shared its stance on Lennox International Inc. (NYSE:LII) in its Q3 2022 investor letter. Here’s what the firm said:
“Lennox International Inc. (NYSE:LII) – LII outperformed during 02. While residential HV AC volume turned negative, current trends are consistent with expectations. Additionally, the new CEO is executing well against stated objectives, specifically, on restoring profitability of the Commercial segment. We are also supportive of management’s decision to sell the international business, which we viewed as a subscale distraction. We see LII as a high quality business in a good industry with opportunities to improve, and we are pleased to see the company effectively attacking opportunities for improvement.”
7. First Trust Mid Cap Growth AlphaDEX Fund (NASDAQ:FNY)
5-Year Price Performance: 35.6%
Total Net Assets as of September 21, 2023: $269.6 million
Expense Ratio: 0.70%
Number of Holdings: 225
First Trust Mid Cap Growth AlphaDEX Fund (NASDAQ:FNY) aims to achieve investment results that closely track the price and yield performance of the NASDAQ AlphaDEX Mid Cap Growth Index. The ETF utilizes the AlphaDEX stock selection methodology to select mid-cap growth stocks from the NASDAQ US 600 MidCap Index. This methodology evaluates stocks based on three growth factors, namely the three-year earnings growth, sales growth, and return on assets. The stocks are ranked on these growth factors, and the top-ranked quintile is selected for inclusion in the index.
6. Vanguard U.S. Momentum Factor ETF (CBOE:VFMO)
5-Year Price Performance: 35.8%
Total Net Assets as of September 21, 2023: $351.38 million
Expense Ratio: 0.13%
Number of Holdings: 554
Vanguard U.S. Momentum Factor ETF (CBOE:VFMO) seeks to track the performance of the CRSP US Momentum Factor Index, which measures the investment return of US stocks with high momentum characteristics. The ETF tracks an index of large and mid-cap US stocks exhibiting high momentum based on their risk-adjusted returns over the past 6 and 12 months. Stocks are weighted by their momentum score. The portfolio is reconstituted and rebalanced twice a year. Vanguard U.S. Momentum Factor ETF (CBOE:VFMO) has a high concentration in the technology sector.
In addition to ETFs, the best mid-cap stocks, such as Vistra Corp. (NYSE:VST), Bill.com Holdings, Inc. (NYSE:BILL), and Antero Resources Corporation (NYSE:AR), are also attracting investor attention.
5. iShares Russell Mid-Cap Growth ETF (NYSEARCA:IWP)
5-Year Price Performance: 37.7%
Total Net Assets as of September 21, 2023: $13.02 billion
Expense Ratio: 0.23%
Number of Holdings: 335
iShares Russell Mid-Cap Growth ETF (NYSEARCA:IWP) is designed to replicate the investment performance of an index composed of mid-capitalization US equities that exhibit growth characteristics. The fund tracks the Russell Midcap Growth Index, which includes mid-cap stocks with higher price-to-book ratios and forecasted growth values. The top 10 holdings of the ETF have a combined weightage of 13.61% of total assets. The top three holdings of the ETF are Apollo Global Management, Inc. (NYSE:APO), IDEXX Laboratories, Inc. (NASDAQ:IDXX), and Cheniere Energy, Inc. (NYSE:LNG).
Here’s what Baron Funds said about IDEXX Laboratories, Inc. (NASDAQ:IDXX) in its Q2 2023 investor letter:
“We have had some extraordinary winners over time. For instance, we bought DexCom, Inc. at a $950 million market cap in 2012, and it is now valued at $50 billion (the stock has appreciated 41% annually since the Fund’s initial purchase). TransDigm Group Incorporated has grown from $1.1 billion at purchase to $49 billion presently (and the stock has appreciated 29% annually since the Fund’s initial purchase 17 years ago). IDEXX Laboratories, Inc. (NASDAQ:IDXX) has gone from $2 billion at purchase to $42 billion over almost 15 years and the stock has appreciated 26% annually during that time frame. The Trade Desk is now valued at $38 billion and was $433 million when we first purchased shares over 6 years ago. The stock has appreciated almost 60% annually since our initial purchase. Pretty amazing. All four stocks have been solid performers this year, contributing nicely to the Fund’s returns.
Since we run a small-cap fund but want to hold on to these great investments as they continue to compound and perform, we reduce the positions sizes over the holding period so that the overall market capitalization of the Fund is palatable. For each of the four stocks mentioned above, we presently own 11% or less of our peak positions. We take the proceeds from the trimming of these positions to fund new small-cap investments, with the hopes of somehow replicating these results.”
4. Vanguard Mid-Cap Growth Index Fund (NYSEARCA:VOT)
5-Year Price Performance: 40.3%
Total Net Assets as of September 21, 2023: $21.42 billion
Expense Ratio: 0.07%
Number of Holdings: 161
Vanguard Mid-Cap Growth Index Fund (NYSEARCA:VOT) is an ETF with the second lowest management fee and the second highest net assets amongst all the best mid-cap growth ETFs on our list. The ETF tracks the CRSP US Mid Cap Growth Index. This index is composed of mid-cap US stocks that exhibit growth characteristics such as sales growth, earnings growth, and momentum. Amphenol Corporation (NYSE:APH), Motorola Solutions, Inc. (NYSE:MSI), TransDigm Group Incorporated (NYSE:TDG), and Arista Networks, Inc. (NYSE:ANET) are the top four holdings of the ETF.
3. Pacer Lunt MidCap Multi-Factor Alternator ETF (NYSEARCA:PAMC)
Performance since Inception: 49.8%
Total Net Assets as of September 21, 2023: $37.53 million
Expense Ratio: 0.60%
Number of Holdings: 133
Pacer Lunt MidCap Multi-Factor Alternator ETF (NYSEARCA:PAMC) is an actively managed mid-cap ETF that rotates between four investment factors – value, momentum, quality, and volatility. It alternates to a new factor every month. For September 2023, the ETF is in the high momentum and high-quality phase. It is one of the few broad-market ETFs that has the highest exposure to the industrial sector, with a weightage of 26.35%.
2. Invesco S&P MidCap Momentum ETF (NYSEARCA:XMMO)
5-Year Price Performance: 50.4%
Total Net Assets as of September 21, 2023: $1.15 billion
Expense Ratio: 0.34%
Number of Holdings: 91
Invesco S&P MidCap Momentum ETF (NYSEARCA:XMMO) is a passive mid-cap momentum ETF that was launched in March 2005. The ETF tracks an index of S&P Mid-cap 400 stocks with the highest momentum scores based on risk-adjusted trailing 12-month returns. The index is rebalanced bi-annually. Reliance Steel & Aluminum Co. (NYSE:RS), Hubbell Incorporated (NYSE:HUBB), Unum Group (NYSE:UNM), and Super Micro Computer, Inc. (NASDAQ:SMCI) are the top four holdings of the ETF.
1. iShares Morningstar Mid-Cap Growth ETF (NYSEARCA:IMCG)
5-Year Price Performance: 50.5%
Total Net Assets as of September 21, 2023: $1.62 billion
Expense Ratio: 0.06%
Number of Holdings: 311
iShares Morningstar Mid-Cap Growth ETF (NYSEARCA:IMCG) has the lowest management fee amongst all the ETFs on our list. The ETF launched in June 2004 makes quarterly distributions and offers a distribution yield of 0.87%. The passive mid-cap growth ETF is managed by the iShares division of BlackRock and tracks an index of mid-cap US stocks that exhibit growth characteristics as determined by Morningstar’s proprietary methodology. Stocks are screened for metrics like revenue and earnings growth. The top 10 holdings of the ETF have a combined weight of 9.91% of total assets. Workday, Inc. (NASDAQ:WDAY), Marvell Technology, Inc. (NASDAQ:MRVL), and TransDigm Group Incorporated (NYSE:TDG) are the top three holdings of the ETF.
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Disclosure: None. 10 Best Mid-Cap Growth ETFs is originally published on Insider Monkey.
