VTWO - VXF Vs. VTWO: Relative Assessment Of U.S. Mid Caps Vs. Small Caps (Technical Analysis)

Summary

• A lot of market commentary has been focused on large-cap indices and large-cap stocks. This article analyzes the layer underneath.
• The small-cap and mid-cap blended ETF has underperformed the small-cap specific ETF and is expected to continue doing so, potentially due to higher exposure to the lagging technology sector.
• My technical analysis framework based on Trend Flow, Support/Resistance Location, and False Breakout Traps does not inspire much bullishness on VXF.

Introduction

A lot of market commentary as of late has been focused on the large-cap indices such as the S&P500 (SP500), the Nasdaq 100 (NDX) and the Dow Jones Index ( DJI ). This is unsurprisingly given the sharp falls by the tech leaders of the last decade; Apple ( AAPL ), Google ( GOOG ), Microsoft ( MSFT ), Meta ( META ), Netflix ( NFLX ), Tesla ( TSLA ).

But how have the mid caps and small caps done? In a recent previous article, I analyzed Vanguard's Russell 2000 small-cap index ( VTWO ). In this piece, I compare its cousin, the Vanguard Extended Market Index Fund ETF ( VXF ) , which consists of a mid-cap and small-cap blend.

VXF and VTWO ETF Compositions

Sector Weight Comparisons

The table above shows the sector weights of the VTWO and VXF ETFs. Although they have similar sector-wise compositions, a main difference is observed in the heavy concentration of the technology sector in VXF, which has 7.4% relative overweight compared to VTWO. While financials, industrials, and consumer discretionary occupied the top 3 sectors for VTWO, technology, financials, and industrials were the major dominant sectors in VXF ETF.

VXF ETF Top 5 Holdings Composition

The top 5 holdings for VXF constitute only 4.1% of the total exposure, suggesting that it is a well-diversified ETF. There is broad sectoral exposure in the top 5 names. The top 5 holdings for VXF are Blackstone Inc. ( BX ), Uber Technologies Inc. ( UBER ), Palo Alto Networks Inc. ( PANW ), Lululemon Athletica Inc. ( LULU ), Cheniere Energy Inc. ( LNG ). The top 5 holdings contribution is greater than VTWO by 2.6%. Further details on VTWO's top 5 composition is shown here.

Key Fundamental Drivers for VXF and VTWO

The key fundamental drivers and monitorables are the usual suspects: interest rates and recession developments. I have written about these themes in-depth in my article on VTWO.

Technical Analysis

If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post , which explains how and why I read the charts the way I do, utilizing principles of Flow, Location and Trap.

Read of Relative Money Flow - VXF

My relative money flow analysis anticipates a sideways move in VXF/SPX500. Rejections were observed at key monthly resistance levels because of a lack of interest from buyers at these levels. Prices have fallen 30% from the recent highs of 2021.

Read of Absolute Money Flow - VXF

On a standalone basis, I anticipate a sharp decline in VXF. This is because buyers got trapped playing the breakout to the upside at monthly resistance levels, triggering an entry for the genuine seller move. I anticipate the price to go down and eventually break the immediate monthly support level, perhaps after some consolidation.

VXF expected to underperform VTWO

As can be seen in the chart above, I anticipate VXF to continue underperforming VTWO after a brief pullback toward monthly resistance, followed by a move down to the monthly support area. This may be due to the 7.4% higher technology exposure amid an environment when technology stocks have been major underperformers.

Summary

VXF ETF is showing a bearish trend on a standalone basis and VXF/SPX500 is showing signs of a sideways move over the coming months. I do not see much signs of bullishness in the overall small-cap and mid-cap space currently and expect the midcap weighted ETF VXF to continue underperforming the small-cap-focused VTWO over the upcoming months. As usual, I am tracking the key fundamental drivers such as interest rates and recession outlooks as I search for a tradeable direction on either VXF or VTWO. Overall, I reserve a 'hold' outlook on both these ETFs.

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