Quality Straight Down The Middle With XMHQ

seekingalpha09-24

I am shifting my portfolio from individual stocks to ETFs and mutual funds to reduce risk and save time.Midcaps, despite underperforming large caps recently, have historically outperformed since 1992 ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nQuality Straight Down The Middle With XMHQ\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-24 22:35 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4722972-xmhq-etf-quality-straight-down-the-middle><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>I am shifting my portfolio from individual stocks to ETFs and mutual funds to reduce risk and save time.Midcaps, despite underperforming large caps recently, have historically outperformed since 1992 ...</p>\n\n<a href=\"https://seekingalpha.com/article/4722972-xmhq-etf-quality-straight-down-the-middle\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"XMHQ","symbol_name":"Invesco S&P MidCap Quality ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4722972-xmhq-etf-quality-straight-down-the-middle","article_id":"2469049063","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1221277935/image_1221277935.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2469049063","pubTimestamp":1727188531,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Midcaps have not performed as well as large caps over several years. Over the past five years, the large-cap S&P 500 has returned 105.85%, while its small midcap sibling has returned a pedestrian 70.49%. That amounts to a 4.27% difference per annum. Anyone paying attention knows that the outsized returns of the S&P 500 Index can be attributed to the skewed performance of the magnificent seven. So, should one invest in midcaps?","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"XMHQ":"Invesco S&P MidCap Quality ETF"},"translate_title":"使用XMHQ将质量直接提升到中间","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XMHQ":0.9},"content_text":"I am shifting my portfolio from individual stocks to ETFs and mutual funds to reduce risk and save time.Midcaps, despite underperforming large caps recently, have historically outperformed since 1992 and offer potential for growth.The S&P MidCap Quality Index, based on specific financial metrics, outperforms the S&P 500 in returns and risk management.Investing in the Invesco S&P MidCap Quality ETF offers a managed, high-quality midcap option with strong historical performance and favorable ratings.   TA2YO4NORI/iStock via Getty Images Introduction In my last article, I wrote that I am migrating my portfolios away from individual securities toward ETFs and mutual funds. I am at a stage where I do not have the time to fuss over managing 20 stocks. It is a better use of my time to look for a few basic funds, and let the internal management do the stock selection. In that piece, I emphasized that I wanted to limit my risk exposure to outsized market risks. I ranked stocks using the Sharpe Ratio, Sortino Ratio, Return/Risk Ratio (aka Risk Z), and Return-to-Inflation Ratio (Inflation Z). I also focused on ETFs that used algorithms based on Quant Models or Special Weights for their respective portfolio management because I believe in managed money. Why Invest in Midcaps? Midcaps have not performed as well as large caps over several years. Over the past five years, the large-cap S&P 500 has returned 105.85%, while its small midcap sibling has returned a pedestrian 70.49%. That amounts to a 4.27% difference per annum. Anyone paying attention knows that the outsized returns of the S&P 500 Index can be attributed to the skewed performance of the magnificent seven. So, should one invest in midcaps? Let’s see what the data reveals.   1/1992-8/2024 Years S&P MidCap 400 Index S&P 500 Index Excess   Average* 32 8/12 11.43% ± 19.06% 10.46% ± 15.96% 0.97%   Up Market* 312 17.67% 17.59% 0.09%   Down Market* 69 -9.26% -15.27% 6.01%   Sharpe Ratio (5-Year)   0.50 0.77 -0.27   Sortino Ratio (5-Year)   0.67 1.01 -0.34   Return/Risk Ratio   0.60 0.66 -0.06   Inflation Ratio   0.44 0.47 -0.03   Representative ETF SPDR S&P Midcap 400 (ARCX: MDY) SPDR S&P 500 (ARCX: SPY)   Expense Ratio 0.24% 0.09% 0.15%   Dividend Yield 1.14% 1.21% -0.07%   Historical Beta 1.03 1.00 0.03  *Average is based on the geometric mean **Up/Down Market averages are based on arithmetic means for rolling 12-month periods  Click to enlarge We have 32 years of data, which is more than enough to make any valid conclusion that one should invest in midcap stocks. As one can see, one should at least consider investing in these small companies given that the small index has outperformed its bigger sibling since 1992. The issue is that those pesky risk metrics might keep one from considering this part of a potential allocation. That is why one should drill down and consider a more focused approach. Consider a More Qualitative Approach Standard and Poor developed a MidCap Quality Index that aims to find companies that have several value components that make the stocks attractive. The methodology is as follows:   Selection Criteria Start with the S&P MidCap 400 Index  Fundamental Measures Return on Equity Accruals Ratio Financial Leverage Ratio      Quality ScoreEach stock is assigned a quality score based on a composite of the three measures mentioned above.   Weighting The index uses a modified market capitalization weighting, using a product of the company's quality score and market capitalization. Around 80 securities with the highest scores are selected.    RebalancingThe index is rebalanced semi-annually on the third Friday of June and December.   As of 9/21/2024, these are the top ten constituents for the index:  Manhattan Associates, Inc. (MANH)-3.92% Williams-Sonoma, Inc. (WSM)-3.84% Carlisle Companies Inc (CSL)-3.67% EMCOR Group, Inc. (EME)-3.22% Erie Indemnity Co Class A (ERIE)-2.43% Tenet Healthcare Corp (THC)-2.40% RenaissanceRe Holdings Ltd. (RNR)-2.26% Reliance, Inc. (RS)-2.14% Comfort Systems USA, Inc. (FIX)-2.09% Toll Brothers, Inc. (TOL)-1.97%  Here Comes the Data So, does this approach allow one to jump in on the midcap bus? Here is the data comparing the MidCap Quality Index to the S&P 500.   1/1992-8/2024 Years S&P 400 MidCap Quality Index S&P 500 Index Excess   Average* 32 8/12 13.85% ± 19.05% 10.46% ± 15.96% 3.39%   Up Market* 312 20.44% 17.59% 2.85%   Down Market* 69 -7.11% -15.27% 8.16%   Sharpe Ratio (5-Year) 0.78 0.77 0.01   Sortino Ratio (5-Year) 1.10 1.01 0.09   Return/Risk Ratio 0.73 0.66 0.07   Inflation Ratio 0.57 0.47 0.10   Representative ETF Invesco S&P MidCap Qlty (ARCX: NYSEARCA:XMHQ) SPDR S&P 500 (SPY)   Expense Ratio 0.25% 0.09% 0.16%   Dividend Yield 0.68% 1.21% -0.53%   Historical Beta 1.04 1.00 0.04  *Average is based on the geometric mean **Up/Down Market averages are based on arithmetic means for rolling 12-month periods  Click to enlarge This is a far better result than the general midcap index. The MidCap Quality Index outperforms the S&P 500 in many critical areas. It outperforms the larger index (13.85% v. 10.46%) regardless of whether it is during an up market (20.44% v. 17.59%) or down market (-7.11% v. -15.27%). The quality index performs better against the risk-free rate (0.78 v. 0.77) and has a better downside deviation risk profile (1.10 v. 1.01). It has also been shown to have a better chance of generating a positive return (0.73 v. 0.66) and beating inflation (0.57 v. 0.47). To tap into this index directly, the only available ETF is the Invesco S&P MidCap Quality ETF (XMHQ). Compared to similar ETFs, the expense ratio is not outrageous, especially since it is managed by special weighting. I like that it has outperformed the S&P 500 for the last five years (123.82% v. 105.85%). Morningstar likes it too and gives it 5 Stars with a Silver Medalist rating. The fund maintains a 4.4 Lipper Leader average and is in the top 11% of the ETF universe. What's The Catch? I do not want to paint a rosy picture of this ETF and its underlying index. Here are a few issues to consider. As a minor consideration, the index benefitted greatly from holding up well during the tech bubble crisis in the early 2000s. That has skewed the data a bit as far as down market data is concerned. During 2008 and 2022, the index and the XMHQ did not hold up as well as in the past. But there is a major consideration too, the tracking error. Since the beginning of 2007, XMHQ has underperformed its related index by a whopping -3.33% per year. While one can expect some underperformance due to timing and expenses, those do not account for this error. It definitely explains the underperformance against SPY (9.63% v. 10.26%) since the beginning of 2007. For now, I am not letting that scare me away because the tracking error has become more reasonable in the last six years at -0.39%, which is more in line with its expense ratio, and is something I can live with. My Take I have always had an affinity for midcaps. I like watching smaller companies becoming larger companies. Now that I have found a quality ETF that allows me to invest in that space, I am comfortable investing 20% of my money in this segment for my allocation. If you have doubts about midcaps, look at the data for midcaps during the tech bubble of 2000-2002, the housing bubble in 2008, and the bond crash of 2022. Midcaps were able to outperform the S&P 500 during those down years and even generated a profit during the unwinding that occurred during 2000-2002. If one focuses on quality midcaps, the risk data proves that it will be a sound decision.  Good luck and prosper","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2469049063"}