EWMC - EWMC: Equal Weighting Gains Investors Little Compared To MDY

2023-08-23 08:00:00 ET

Summary

• The SPDR S&P MidCap 400 ETF invests based on the S&P MidCap 400 Index.
• The Invesco S&P MidCap 400 Equal Weight ETF invests based on the S&P MidCap 400 Equal Weight Index.
• The article compares MDY against EWMC in terms of allocations, risk factors and returns experienced by investors.
• MDY gets a Buy rating as a Core ETF to hold. EWMC only gets a Hold rating as there appears to be better ETFs to gain Alpha from.

Introduction

Being based on S&P Indices, the SPDR S&P 500 ETF ( SPY ) and the SPDR S&P MidCap 400 ETF ( MDY ), for many might comprise part of their Core holdings, ETFs they build out from. Part of the build out is to capture Alpha from ETFs that invest in the same universe of stocks, but do so with one or two factors adjusting the weights from the standard configuration. One popular means is to simply invest in all the same stocks, but instead of weighting the portfolio, as the benchmark does, by market weight, equal weight all the holdings. This article compares the MDY ETF against such an ETF, the Invesco S&P MidCap 400 Equal Weight ETF ( EWMC ). As readers will see, EWMC has not provided enough benefits to be added to the portfolio. That said, there is no reason to abandon it either if already owned, thus a Hold rating. I give the MDY a Buy rating as a Core holding.

SPDR S&P MidCap 400 ETF review

Seeking Alpha describes this ETF as:

The SPDR S&P MidCap 400 ETF Trust invests in public equity markets of the United States. The fund invests in stocks of companies operating across diversified sectors. The fund invests in growth and value stocks of mid-cap companies. It seeks to track the performance of the S&P MidCap 400 Index , by using full replication technique. SPDR S&P MidCap 400 ETF Trust was formed on April 27, 1995.

Source: seekingalpha.com MDY

MDY has $19.4b in AUM and costs investors 23bps in fees, a bit high these days for a pure index ETF. The TTM Yield currently is 1.3%.

Index review

Understanding the Index used helps when analyzing the ETF that uses it.

Introduced in 1991, the S&P MidCap 400 provides investors with a benchmark for U.S. mid-sized companies, reflecting the distinctive risk/return characteristics of this piece of the market. The S&P MidCap 400 represents approximately 5% of the U.S. equity market and around 3% of the investable global stock market. The S&P 400® has distinct constituents from the S&P 500 and S&P 600®, allowing market participants to potentially target various size segments without overlapping constituents.

Source: spglobal.com MC 400 Index

MDY holdings review

Starting with sectors, we get the following.

The Top 3 sectors represent just over half the portfolio weight. Unlike Large-Cap ETFs, Technology is under 10% for this ETFs, meaning an ETF like MDY can provide sector diversification to a portfolio loaded with Large-Cap stocks. Unlike SPY, no stock has a weight over 1%.

Top holdings

As expected, the ETF holds 400 stocks, with the Top 20 being just under 12% of the total weight. I always like to know what kind of impact the smallest half of the portfolio can have. Here those 200 stocks still account for 31% of the portfolio's weight. This helps explain why the two ETFs reviewed have similar results.

MDY distributions review

An important feature of any distribution is seeing its growth outpacing inflation. MDY has managed to do that over the past decade, thus achieving an "A" grade from Seeking Alpha for this factor.

Invesco S&P MidCap 400 Equal Weight ETF review

Seeking Alpha describes this ETF as:

Invesco S&P MidCap 400 Equal Weight ETF invests in public equity markets of the United States. The fund invests in stocks of companies operating across diversified sectors. It invests in growth and value stocks of mid-cap companies. The fund seeks to track the performance of the S&P MidCap 400 Equal Weight Index . EWMC start on 12/3/2010.

Source: seekingalpha.com EWMC

EWMC has just $239m in AUM, a fraction of what MDY has. Fees are higher (40bps) and the TTM Yield is slightly lower (1.2%).

Index review

The same stocks are in both indices, thus stock changes are made in the equal weight index when they are made in the underlying index. Each index incurs quarterly rebalancing. The equal-weight index has a much higher turnover rate. This does affect the cost of managing each ETF and helps explain the fee difference.

EWMC holdings review

While the allocations changed, the order of the Top 5 sectors did not. These also are the majority of sectors where the allocation was affected by equal weighting the ETF.

After each quarterly rebalancing, each stock should be .25% in weight. By mid-August, the weights have shifted based on performance. The 20 stocks with the top weights are shown next.

There are another 18 stocks with a weight of .30%. The smallest weight currently is .09% for Hawaiian Electric ( HE ), which comes as no surprise with the news from Maui. Even with movements since the end of June, the smallest 200 stocks still account for 45% of the portfolio.

EWMC distributions review

EWMC has also managed to growth their distributions faster than inflation over the past decade and even more recently when inflation spiked, though not as well overall as MDY, thus receiving just a "B-" grade from Seeking Alpha.

Comparing ETFs

Changing how the ETF weights its holdings effects more than just that factor. Here I compare some of the more important ones as there could be benefits in owning one over the other or combining both in selected weights to achieve balance within certain factors. I will start with basic data points.

Portfolio strategy

I have adopted the strategy of building a base of ETFs I refer to as my Core holdings, ETFs like MDY or SPDR S&P 500 ETF ( SPY ) for Large-Cap. I use the Vanguard Extended Market ETF ( VXF ) for my sub-LC Core ETF. Considering the market-cap allocation within MDY, it is not that much different.

As for Alpha generation, I own the WisdomTree MidCap ETF ( EZM ), which I reviewed in early 2022 ( article link ). Invesco has other factor ETFs for the Mid-Cap space, both which I recently gave Buy rating too that have treated investors well.

• XMMO : Momentum Strategy Working For Mid-Cap Stocks
• XMHQ Is Seeking Alpha's Top Ranked Mid-Cap Blend ETF!

Here is basic data on those three ETFs compared to those covered in this article.

Final thoughts

My suggestion is to hold an ETF like the SPDR® S&P MIDCAP 400 ETF as a Core holding for Mid/Small-Cap exposure and add one of the others mentioned to potentially add Alpha to your portfolio. Please note that EZM is classified as a Value ETF; XMMO as a Growth ETF, not Mid-Cap Blend as MDY, EWMC, or XMHQ are.

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