One are of the exchange traded fund (ETF) market I have persistently avoided has been the market capitalization-weighted ETFs, for a number of reasons.
Buying companies in proportion to their weighting on a specific index is fundamentally the same as momentum or growth investing.
Buying those companies which have grown faster than the market (and in theory are expected to grow faster in the long run) works well during bull markets, but when the economic growth drivers which underpin the valuations of these companies are disrupted, those which have underperformed and now encompass a smaller weighting are likely to outperform (those pesky value stocks).
One mid-cap ETF which I believe takes the correct approach for value investors is the WisdomTree U.S. Mid-Cap Dividend ETF (NYSE:DON). This ETF weights companies not by their market capitalization, but rather, by the expected dividend yield of mid-cap firms.
This fund thereby applies a larger weight to firms which have seen their dividend yield increase (either through dividend distribution increases or a declining share price), which is music to a long-term fundamental income-oriented value investor such as myself.
This fund’s risk profile is re-balanced as dividend yields increase or decrease over time, providing investors with a higher relative yield and increased exposure to high dividend paying stocks, allowing income-oriented investors to retain higher payouts.
Of course, interest rate increases remain a headwind to this ETF, but over the long-haul, holding this ETF should outperform high-priced blue-chip stocks, on average.
Invest wisely, my friends.
