I highlight key price levels to monitor on the chart ahead of bearish seasonal trends in September.
So much focus is on either US large caps or small caps. Indeed, the S&P 500 and the S&P SmallCap 600 are at the center of the valuation debate, usually leaving out mid-caps. Historically, though, mid-caps sport the best long-term performance.
As the narrative goes, mid-caps include faster growing and successful companies, leaving out many low-quality names in the small-cap index, and once firms get too big, they are 'promoted' into the S&P 500, and then go one to produce steadier returns as more mature companies.
As it stands, the S&P MidCap 400 index trades at just 15.2 times forward earnings estimate. That's more than four turns cheaper than the S&P 500 and only 0.3pts pricier than the S&P SmallCap 600.
Let's focus on a mid-cap fund that has seen a significant volume influx in 2024. I have a buy rating on the Invesco S&P MidCap Quality ETF (NYSEARCA:XMHQ). I like the index's construction and management processes, while its current valuation is attractive.
According to the issuer, XMHQ is based on the S&P MidCap 400 Quality Index. The Index is a modified market capitalization-weighted index that holds approximately 80 securities in the S&P Midcap 400® Index that have the highest quality scores, which are computed based on a composite of three proprietary factors.
XMHQ is a growing ETF, now with nearly $5.0 billion in assets under management as of August 12, 2024. The fund features a low 0.25% annual expense ratio and pays a high 5.3% forward dividend yield. Share-price momentum is also impressive, but the XMHQ has pulled back from recent highs, and I will note important levels on the chart later in the article.
As for risk, the 80-plus holding portfolio can turn volatile at times, resulting in a lukewarm C ETF Grade by Seeking Alpha Quant rating. Still, liquidity metrics are sound, and that's evidenced by average daily volume of more than 450,000 shares and a 30-day median bid/ask spread of eight basis points. Thus, it's prudent to use limit orders during the less liquid period of the trading day (often right after the opening bell).
Looking closer at the allocation, the 5-star, Silver-rated ETF by Morningstar plots in the lower-right section of the style box, indicating its bent to SMID-cap growth. There's just 15% value access, so changes in investment growth themes can impact price action with XMHQ.
The current price-to-earnings ratio is 18.7, which is not the cheapest mid-cap fund around, but that comes alongside a high 12.3% long-term earnings growth rate. The resulting PEG ratio is decent near 1.5. Finally, the quality of the fund is high when scanning the factor assessment.
Where we do find risk is with the sector breakout. Nearly one-third of XMHQ is invested in the risk-on and highly cyclical Industrials corner of the US stock market. So, changes in macroeconomic growth expectations play a pivotal role in how the ETF performs.
Information Technology is 15% of the fund, which is not far from the sector's weight in the broad Mid-Cap Index (though much less than I.T.'s weight in the S&P 500). I do like that the top 10 assets command less than a 30% weight in the fund, so there's diversification in that respect.
Another risk? Seasonality. According to performance history in the past 10 years, XMHQ tends to struggle as we head into the final half of the third quarter. Thus, timing your entry is important right now.
The good news is that the ETF has done very well throughout the Q4 period going back to 2014.
XMHQ fell 17% from its March 2024 all-time high to the panic-low earlier this month. Notice in the chart below that there's now a high amount of volume by price above the current share price. Furthermore, the ETF fell below its long-term 200-day moving average in the last several sessions, and it's currently struggling to climb back above it. So, those are negative signals.
What's encouraging, however, is that there was a bullish divergence in the RSI momentum oscillator at the top of the graph. That tells me that selling pressure is not as intense despite a lower low in price. I'd like to see XMHQ rally back above its falling 50-day moving average and the $104.37 high from late July. There is long-term support down in the $84 to $86 range.
Also take a look at the measured move upside target that was achieved earlier this year. The $24 range from late 2021 through Q4 of last year resulted in a target to near $109 based on the previous range's height. So, corrective price action since March makes sense, and no major technical damage has been done.
I have a buy rating on XMHQ. I see this mid-cap fund with high quality as a decent value today with a solid long-term EPS growth rate. The chart has work to do if you are a bull, but no major harm has been inflicted during this multi-month pullback.