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ETF Specialist

Efficient Exposure to Mid-Cap Stocks

While this isn’t the only ETF that tracks the S&P MidCap 400 Index, a structural advantage gives this fund an edge.

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 IShares Core S&P Mid-Cap (IJH) is not the oldest or most heavily traded ETF tracking the S&P MidCap 400. That distinction belongs to  SPDR S&P MidCap 400 ETF (MDY). But IJH has a structural advantage that gives it an edge. Like most funds, IJH enjoys the flexibility afforded by the Regulated Investment Company structure, whereas the more heavily traded ETF in this category, MDY, is organized as a unit investment trust, which is a more restrictive legal structure that precludes securities lending and dividends reinvestment. During the past decade through November, MDY has lagged the S&P 400 MidCap by 0.34 percentage points annualized, compared with just 0.13 percentage points for IJH. While traders continue to prefer MDY due to its heavy volume and deep options market, a lower expense ratio and structural advantages make IJH a better option for long-term investors in our view. Asset growth in this fund has improved liquidity to the point were trading costs between the two funds are comparably low.

IJH provides low-cost exposure to U.S. mid-cap stocks. Paired with an appropriate investment in large-cap stocks, it can serve as a suitable core holding and help form a diversified allocation to U.S. equities. The fund offers broad diversification across industries and individual companies in the mid-cap market segment. It is designed to fit between the large-cap S&P 500 Index and S&P SmallCap 600 Index to cover the vast majority of the U.S. equities market with minimal holdings overlap. Active investors might also use this fund to tactically overweight mid-cap stocks.

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Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.