An S&P 500 ETF might be a go-to for some investors, but the iShares S&P Mid-Cap ETF (ASX: IJH) has shown better long-term performance. Which is better?
What Are ETFs?
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.
The Rask Finance video below explains ETFs in more detail:
Mid-Cap Versus Large-Cap
To make this comparison, I’ll 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.
As we know, the S&P 500 ETF invests in the 500 largest US companies by market capitalisation. 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 investments, the S&P 500 ETF invests heavily in information technology, health care, financials and communication, while the Mid-Cap ETF’s top sectors (in order) are financials, industrials, and information technology. One of the big differences is that around 10% of the Mid-Cap ETF is invested in real estate, compared to around 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 compares 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, slightly 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 does pay slightly higher dividends, with a trailing yield of 1.64% compared to Mid-Cap’s 1.22%.
Fees And 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.
You could argue that the S&P 500 ETF has better diversification benefits although the difference between 400 and 500 companies is negligible and both are diversified across sectors.
The Mid-Cap ETF is a compelling option and has performed much better over a 19-year period, although the last year has been slow. 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 higher growth prospects.
For our number one ETF pick, check out the free report below.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
Disclosure: At the time of writing, Max owns shares in the iShares S&P 500 ETF (ASX: IVV).