XMHQ - XMHQ: The Middle Ground Sweet Spot For Mid-Caps

2024-01-09 08:38:50 ET

Summary

• The Invesco S&P MidCap Quality ETF is a recommended option for investors looking to tilt towards smaller, quality mid-cap stocks.
• XMHQ aims to mirror the performance of the S&P MidCap 400 Quality Index, which consists of medium-sized corporations with superior quality scores.
• XMHQ's top holdings include Manhattan Associates, Deckers Outdoor, Williams-Sonoma, Reliance Steel & Aluminum, and Super Micro Computer.

I continue to hammer the idea that 2024 likely will NOT be the year of large-caps, and that tilting smaller with a focus on quality is likely the way to play new emerging trends. The Invesco S&P MidCap Quality ETF (XMHQ) is worth considering as it checks multiple boxes for big trends I think play out this year.

XMHQ is a fund that aims to mirror the performance of the S&P MidCap 400 Quality Index. This index is composed of medium-sized corporations listed on the S&P MidCap 400 Index that display superior quality scores. These scores are derived from three fundamental measures:

• Return on Equity - a financial metric used to assess a company's profitability by revealing how effectively the money from shareholders' equity is being turned into net income. Essentially, ROE is the amount of net income returned as a percentage of shareholders' equity.
• The accruals ratio - a measure used to determine the quality of a company's earnings by comparing the accruals portion of earnings to total net earnings. This ratio helps in identifying the proportion of earnings that are not related to cash flows, which can provide insights into the sustainability of earnings.
• The financial leverage ratio - a measure that quantifies the extent to which a business relies on borrowed capital, as opposed to its own equity, to finance its activities. This metric not only suggests a firm's capacity to honor its debt commitments but also highlights the balance between the possibility of amplified returns and the heightened risk that comes with leveraging.

XMHQ's Holdings

XMHQ is comprised of a diverse range of holdings, the top five of which are explored below:

1. Manhattan Associates Inc. (MANH): A software company that provides supply chain management solutions, Manhattan Associates is one of the top holdings in XMHQ.

2. Deckers Outdoor Corp (DECK): a leading footwear designer and distributor renowned for its innovative and fashion-forward products that include popular brands like UGG, Teva, and Hoka One One.

3. Williams-Sonoma (WSM): a premier specialty retailer of high-quality home products, offering distinctive kitchenware, furniture, and linens, as well as other home accessories through its portfolio of brands, which includes Pottery Barn and West Elm.

4. Reliance Steel & Aluminum Co (RS): a prominent metals service center operator that specializes in providing a vast inventory of products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, and titanium.

5. Super Micro Computer Inc (SMCI): a company which stands at the forefront of the server technology industry, excelling in the creation of high-efficiency, high-performance servers. The company is dedicated to pioneering comprehensive eco-friendly computing solutions that cater to a broad spectrum of applications, including data centers, cloud services, enterprise information technology, big data analysis, high-performance computing tasks, and intricate embedded systems.

These 5 holdings account for 14.89% of the portfolio, indicating that this is a fairly diversified funds overall.

Sector Composition and Weightings

The fund's portfolio has substantial allocations to various sectors. The industrials sector commands the largest share, around 31%, followed by consumer discretionary and financials. Investors should note that the Quality Factor introduces sector tilts to a portfolio, which can differ from the cap-weighted S&P 500.

Peer Comparison

When compared to similar ETFs like the Vanguard Mid Cap ETF ( VO ) and the iShares Core S&P MidCap ETF ( IJH ), XMHQ stands its own. While VO and IJH have larger assets under management, XMHQ has performed far better with the quality focus.

Assessing the Theme

The central theme of XMHQ is investing in quality mid-cap companies. While these companies present higher growth prospects than large-cap companies, they are less volatile than small-cap companies, thus providing a balanced investment option. However, investors must be aware that mid-cap stocks may be subjected to more market volatility and risks than large-cap stocks.

In Conclusion

The Invesco S&P MidCap Quality ETF presents a viable investment opportunity, given its focused approach on quality mid-cap stocks and potential for growth. While there are inherent risks associated with mid-cap investing, the potential for higher returns may make XMHQ a worthwhile addition to a diversified investment portfolio. This is a good fund to consider if you're nervous about owning the S&P 500 here.

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