IJH: Preparing For Higher Rates And Inflation

ETFS

Thesis Summary

The iShares Core S&P MidCap ETF (NYSEARCA:IJH) offers exposure to a balanced portfolio of stocks. It proffers an outstanding way to invest and gives mild divulgence to the U.S mid-cap stocks. IJH is low cost and tax efficient with an expense ratio of 0.05%. Mid-cap stocks have underperformed, but the fund will thrive when the American economy recovers. Also, mid-cap stocks have historically outperformed the market in inflationary environments, and when rates are rising.

ETF Overview

IJH tracks the overall performance of the S&P MidCap 400 Index. The index modified once a year is a widely-known benchmark for capturing the distinct risk and return features for mid-sized equities in the U.S. This implies that IJH holds only mid-cap U.S. stocks. These mid-cap stock investments are selected by representative sampling. The sampling is a unique technique employed by this fund to track the Index.

Let’s have a look at some of the fund’s significant holdings:

Sources: YCharts

The chart above shows a list of 25 IJH holdings. Notably, IJH has a list of holdings that positively contributes to the fund’s asset.

From the chart, we can see that every listed holding of the traded fund holds less than one percent of IJH’s available asset. Admirably, while Etsy, Inc. (NASDAQ:ETSY) isn’t performing so greatly on the fund’s holding, the drawdown from this particular security will not drastically affect the fund’s asset.

By percentage of weight, Etsy holds the highest value of IJH’s asset. The risk of trading funds like this is always reduced and regulated. With such an advantage of controlled risk, let us have a look at how the fund has generally performed alongside its peers?

Well, below is a chart which shows the comparative performance of IJH:

Source: YCharts

The chart above shows the general performance of the ETF viz-a-viz its peers. With a simple glance, we can deduce that returns have been very similar. There is no clear-cut difference between how each of the peers performed. This makes it a very competitive market.

In a general view, the S&P 500 Total Return outperformed the entire fund, while the iShares Core S&P MidCap ETF underperformed all its peers (although the margins are quite negligible).

As a traded fund, IJH performs greatly. However, the fund missed out on being among the best in the market competition by a small margin. IJH together with the SPDR® Portfolio S&P 400 MidCap ETF (NYSEARCA:SPMD) has the lowest expense ratio at 0.05%. The most expensive of the funds is the John Hancock Multifactor Mid Cap ETF (NYSEARCA:JHMM).

IJH is also the largest fund, with a total AUM of $42 billion. Meanwhile, SPMD has $2.624 billion, and JHMM is the smallest, with only $1.568 billion.

Lastly, it is worth mentioning the funds mentioned above all pay out a dividend of around 1-1.8%. SPMD has the highest payout, with a yield of 1.7%, while IJH pays out 1.66%.

What I like about IJH

IJH in comparison to its peers performs fairly well, which gives a good reason to like the traded fund. However, trading this fund provides a few other advantages. Here are some of the advantages which I like about this fund:

The fund provides its largest exposure to the U.S. regulated and stabilized securities that promise high and stable profit yields. Isn’t that something any investors should be happy about?

Even with its ill, below-par performance among its peer (which could be attributed to the drawdowns many of its holding experienced), the fund still strives and has steadily maintained a close-range performance with its peers.

The great thing about IJH is that it offers diversified exposure to mid-cap stocks, which have potential to yield great returns. As long as some of the stocks in the fund make it big, overall returns could be huge. Meanwhile, the downside is reduced thanks to diversification.

Overall, mid-cap stocks and ETFs offer a great investment opportunity for two reasons. Firstly, as they are less followed, it is easier to find discrepancies between the stock price and fair value. Companies in the S&P 500 are followed by thousands of banks and analysts and they are often priced very close to fair value. Secondly, valuations are lower, due to size and risk, but also because “mom and pop” investors will not regularly invest in these. This drives valuations for blue chips sky-high, while smaller stocks with great potential remain unloved.

Lastly, it is worth noting that mid-cap stocks can act as an inflationary hedge, and they have historically outperformed the broader market in flat or rising interest rate environments thanks to their nimbleness and flexibility. If Treasuries are to serve as an indicator of inflation and rates, which they have in the past, we could indeed see this happen in the near future.

Risks

Market volatility is always a subject to worry about whenever it comes to Exchange Traded Products (ETPs) like this ETF. For IJH, market volatility is subject to the risk associated with the fundamental index of this fund. The majority of these risks are those common with investing in smaller companies, commodities, and fixed-income investments. Other general risks that could affect this fund are foreign securities, currency exchange rate, political, and economic risks.

The biggest risk coming from this sector is in the debt market. A few months ago, corporate debt was in trouble and would have suffered a massive default if it hadn’t been for the Fed. With rates now at 0 and the Fed balance sheet at the biggest ever, next time things might go down differently.

Takeaways

IJH is an ETF with an appropriately managed portfolio. It holds a large basket of diversified stocks and sectors, but bear in mind they are all concentrated in the U.S. equity market. Mid-caps could be a good bet for the future if you expect inflation and rates to pick up. In any case, IJH offers an easy way to enter a segment of the U.S. equities market which doesn’t receive as much attention as it should.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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