Equity markets either trend upward or downward, or remain in a tight range, but they typically fluctuate between bull and bear markets. Bull markets are indicative of a healthy economy, strong consumer confidence and optimism. Contrary to bull markets, bear markets are indicative of a weakening economy, low consumer confidence and a market value drop of over 20%.
Investing in the Mid-Cap Equity Market
Investors should always aim to preserve capital in bear markets. For example, if an investor has a portfolio worth $10,000 and loses 25% during a bear market, that investor needs to generate a return of over 30% to bring his or her investment capital back to $10,000. Mid-cap value stocks tend to be less volatile and outperform the market during bear markets, which helps to preserve capital. Therefore, investors should consider the following three mid-cap value exchange-traded funds (ETFs) that provide a cost-effective way to invest in the mid-cap equity market for both bull and bear markets.
PowerShares S&P MidCap Low Volatility Portfolio
Although the PowerShares S&P MidCap Low Volatility ETF (NYSEARCA: XMLV) is not a pure mid-cap value ETF, it allocates 20.12% to mid-cap value and 30.12% to mid-cap blend stocks. The fund seeks to provide investment results corresponding to the S&P MidCap Low Volatility Index, its underlying index. Under normal market conditions, XMLV invests at least 90% of its total net assets in common stocks included in its underlying index. Since the ETF holds 80 mid-cap stocks with the lowest 12-month historical volatility included in the S&P MidCap 400 Index, it should perform well in both bull and bear markets.
Based on trailing three-year data, XMLV had a beta of 0.73 when measured against the Standard & Poor's 500 Index (S&P 500 Index), a widely used leading indicator of the U.S. equity market, as of July 31, 2016. It is 27% less volatile than the market and should lose less value than the market during bear markets, which is beneficial for capital preservation. Moreover, it had an average annual up-market, or upside, capture ratio of 94.30% and down-market, or downside, capture ratio of 56.76%. Therefore, it only slightly underperformed the S&P 500 Index during periods of positive returns but lost less than the index in down markets.
WisdomTree MidCap Dividend Fund
The WisdomTree MidCap Dividend Fund (NYSEARCA: DON) is a mid-cap core value ETF that aims to track the WisdomTree MidCap Dividend Index. The index is comprised of mid-cap dividend-paying stocks with an average market cap of $5.5 billion, as of June 30, 2016. Investors could use the ETF in a mid-cap value- and income-oriented strategy. As of July 31, 2016, the fund had a trailing five-year beta of 0.94 when measured against the S&P 500 Index; therefore, it is theoretically 6% less volatile than the index. Moreover, it had an upside capture ratio of 98.06% and a downside capture ratio of 83.89%. These ratios indicate that the fund performed in line with the market during up markets but outperformed the S&P 500 Index during down markets.
S&P MidCap 400 Dividend Aristocrats ETF
The S&P MidCap 400 Dividend Aristocrats ETF (NYSEARCA: REGL) is a mid-cap value ETF that focuses primarily on stocks included in the S&P MidCap 400 Index that have grown dividends for at least 15 consecutive years. The fund seeks to track the performance of the S&P MidCap 400 Dividend Aristocrats Index, its underlying index. The ETF was issued on Feb. 3, 2015, and had a year to date (YTD) return of 24.12%, as of Aug. 23, 2016.
Since the fund is fairly new, there is no data provided for its beta against the S&P 500 Index. However, over the past year, the ETF had an upside capture ratio of 145.07% and a downside capture ratio of 88.07%. Therefore, REGL significantly outperformed the S&P 500 Index during up markets and performed moderately better than the index during down markets. It should continue this pattern due to its investment in strong dividend-paying value stocks to outperform the market on a consistent basis.