MDYG ETF: No better than a peer large-cap growth fund

Overview of ETFs

SPDR S&P 400 Mid-Cap Growth Fund (NYSEARCA:MDYG) invests in a portfolio of mid-cap growth stocks in the United States. The fund has performed well since 2022, but its performance still lags behind large-cap growth fund peers. This was a poor performance This is primarily due to its lower exposure to technology stocks. Hence, MDYG’s consensus long-term earnings growth rate is inferior to its large-cap growth counterpart. The Fund may also experience greater downside than its large-cap counterpart in a bear market. Therefore, investors may want to look for alternatives instead.

Fund analysis

MDYG has come off its league low in 2022 and set a new record this year

MDYG has performed very well since hitting a cyclical low in mid-2022. As can be seen from the chart below, since June 16, 2022, MDYG has provided a price return and The total return is 44.6% and 48.1%, respectively. This has been a very good comeback over the course of about two years. The fund outperformed its small-cap growth peer, the SPDR S&P 600 Small Cap Growth ETF (SLYG), which generated a total return of just 31.9%. However, MDYG still underperforms its large-cap counterpart, the SPDR Portfolio S&P 500 Growth ETF (SPYG), achieving a better overall return of 53.6%.

MDYG has underperformed its large-cap peers in the past decade

If we look at the performance of MDYG and its peers over a 10-year period, we continue to see a similar trend. In the past 10 years, MDYG has generated a total return of 164.4%. This return was slightly better than SLYG’s total return of 153.7%, but underperformed SPYG by a wide margin. As can be seen in the chart below, MDYG’s total return of 164.4% was significantly lower than SPYG’s return of 290.9%.

MDYG’s exposure to technology stocks is limited

We believe one of the main reasons MDYG underperformed SPYG was due to the S&P 400’s lower exposure to IT. In fact, the IT sector represents only about 10.1% of the S&P 400. Since the MDYG portfolio only selects growth stocks from the S&P 400, the lack of exposure to technology stocks means that MDYG’s exposure to technology stocks will also be limited. This is indeed the case. As can be seen from the table below, the IT sector still represents only 12.4% of MDYG’s total portfolio. In contrast, technology stocks represent 48.9% of SPYG’s total portfolio. That’s nearly half of SPYG’s portfolio.

As we know, the technology sector has witnessed rapid growth in the past few decades. Many technology ETFs can easily beat the broader market by a large margin. We’ll use the chart below to show why this low exposure to technology has been a significant drag on their past performance. We know from the table above that the top four sectors in MDYG’s portfolio are: Industrials (29.3%), Consumer Discretionary (17.7%), Information Technology (12.4%), and Healthcare (9.1%). Below is a chart showing 4 ETFs focused on these 4 sectors. As can be seen from the chart, the Technology Select Sector SPDR ETF (XLK) has generated a total return of 553.1% in the past 10 years. In contrast, the remaining three ETFs focused on industrials, consumer discretionary, and healthcare sectors only generated returns between 179% and 202%. This explains why MDYG’s low exposure to technology stocks is the main reason behind the underperformance of its large-cap counterpart, SPYG.

Will MDYG’s poor performance continue next year?

Below is a graph showing the estimated annual EPS growth rates for the various sectors in the S&P 500 Index in 2024 and 2025. While the average EPS growth rates for the various sectors are based on the stocks in the S&P 500 Index and not for the stocks in the S&P 400 Index, it It helps us see growth trends for different sectors. In other words, what is important is not the exact growth rates, but rather the strength of growth across different sectors in 2024 and 2025. For example, the IT sector is expected to witness strong growth rates in both 2024 and 2025, and will outperform most other sectors. . Mid-cap technology stocks will likely see outperformance versus other sectors as well. On the other hand, the consumer staples and utilities sectors are experiencing lower growth rates than many other sectors. This is also likely to be the case for the mid-cap utilities and consumer staples sectors. MDYG’s low exposure to technology stocks means it will not enjoy the full benefit of the technology boom in 2024 and 2025.

One good news is that the industry sector is expected to grow rapidly in 2025. In fact, the sector is expected to achieve a growth rate of 15.1% in 2025. This will be much higher than the 2.3% rate of 2024. We know that this sector represents About 29.3% of MDYG portfolio. Therefore, we believe that MDYG is likely to deliver better returns next year compared to last year. However, the growth rate of the industrial sector in 2025 still lags behind the IT growth rate of 20.5%. Hence, we believe SPYG’s heavy exposure to technology stocks is likely to help it continue to outperform MDYG in terms of earnings growth.

This is indeed the case if we look at the consensus estimates for stocks in the MDYG and SPYG portfolio. As the table below shows, the average long-term earnings growth rate for stocks in the MDYG portfolio is expected to be approximately 10.9%. This is more than 4 percentage points lower than the average stock growth rate of 15.4% in the SPYG portfolio.

Click to enlarge

Source: Morningstar

The downside risks MDYG faces cannot be ignored

Besides MDYG’s lower long-term dividend growth rate compared to its large-cap counterpart, the fund may also perform less than expected in a bear market. As can be seen in the chart below, MDYG has seen much greater decline volume than SPYG in most market corrections in the past 10 years, with the exception of the downturn in 2022. Just like a big boat that can weather the storm better than small caps and stocks typically do Large companies with proven business models and stronger balance sheets. Therefore, they tend to perform better than their mid- and small-cap peers.

Investor takeaways

MDYG holds a portfolio of mid-cap growth stocks. However, the fund will likely underperform its large-cap growth counterpart due to its lower exposure to technology stocks. Therefore, we think investors may want to look to other growth ETFs instead.

Additional disclosure: This is not financial advice and all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.