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
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.
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.
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.
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.
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.
Disclosure: At the time of writing, Max owns shares in the iShares S&P 500 ETF (ASX: IVV).