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As is par for the course, mid-cap stocks and the related exchange traded funds are toiling in anonymity again this year – an arguably quixotic situation when considering all the attention lavished and ink spilled on small-caps.
In another par for the course scenario, mid-caps are beating their smaller peers this year despite the latter being the attention-grabber. Year-to-date (as of June 24), the S&P MidCap 400 Index is lower by 0.7% while the Russell 2000 and S&P SmallCap 600 indexes are off an average of 3.8%. Kudos to the mid-cap index because it’s also been slightly less volatile than those two small-cap counterparts.
Understandably, the year-to-date showing of the S&P MidCap 400 Index isn’t going to foster excitement among investors, but there is a way to do just that with mid-caps: Add dividends to the mix. Take the case of the ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL).
REGL, which recently turned 10 years old, follows the S&P MidCap 400® Dividend Aristocrats® Index – a gauge that mandates that member firms have minimum dividend increase streaks of 15 years. That methodology can be significant over various timeframes as highlighted by REGL being up 2.2% year-to-date.
For those that aren’t convinced by just six months of performance, consider the following. Over the past decade, REGL returned nearly 150%, easily topping the aforementioned S&P mid- and small-cap indexes as well as the Russell 2000. REGL accomplished that feat with significantly less annualized volatility than those benchmarks.
Mid-Cap Dividend Payers Right for the Times
As things stand today, it appears the White House is either working out trade deals or willing to back off some of the harsher previously floated trade levies. However, advisors know that trade policy can change on a dime with this administration.
With that in mind, REGL is worth examining for client portfolios because mid-cap stocks, particularly those that are dividend growers, generate significant portions of their sales within the U.S. That’s a trait often mentioned by small-cap bulls and while accurate, smaller stocks just aren’t delivering performance to justify the risk relative to the less volatile, better-performing REGL.
(Chart Courtesy: ProShares)
“Mid-cap stocks, particularly the high-quality companies of the S&P MidCap 400 Dividend Aristocrats, are largely shielded from the noise around tariffs; most of their revenues are generated domestically,” according to ProShares research. “In contrast, roughly 40% of large-cap S&P 500 revenues come from offshore, potentially magnifying the exposure of those companies to tariff-based headwinds.”
Home to 53 stocks, REGL indeed has a heavy domestic revenue bias as just over half its roster is allocated to financial services and utilities – companies that are depending on this country for nearly all of their top and bottom line growth.
REGL Has a Virtuous Approach
Advisors and many retail investors know about the importance and virtues of dividend growth, but it’s a perk many solely associate with large-cap equities. REGL dispels that notion. In fact, roughly half the ETF’s holdings have dividend increase streaks spanning at least 25 years, easily beating the 15-year mandate required for entry into the index.
REGL’s dividend growth track record is a clear quality sign and one that’s increasingly pertinent today because, let’s be honest, the macroeconomic picture isn’t perfect. When companies boost payouts during challenging, that’s a sign of confidence.
“When companies can raise their dividends in difficult economic periods, they are signaling their belief in the underlying strength of their businesses and management’s confidence in their ability to continue to grow revenues, profits and cash flows,” concludes ProShares.
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