Five months ago I began back testing some portfolios. After looking at the results, I began tilting my portfolio towards Mid-Cap Value using the IJJ ETF. Mid-Cap Value stocks can under perform on the short-term, but have a history of outperforming on the long-term (more than 10 years).
Given what the stock market has done this year, and comparing to large-cap tech stock performance, it’s turned out to be a great decision.
What makes Mid-Cap stocks a good bet?
Mid-cap companies sit in the sweet spot; that place between small cap and large cap companies. Although these companies haven’t grown as much as large-caps, these companies are often more resilient than small-caps.
Another reason IJJ has done ok is because Value is outperforming Growth in the rising interest rate environment.
What is IJJ?
IJJ is short for- I Shares S&P Mid-Cap 400 Value ETF
Please note-For this post, I will be using ITOT as a comparison tool. I know it represents a TOTAL MARKET ETF; however, I’m doing so to show what you get with IJJ compared to the total market ETF. IJJ is certainly no replacement for your standard total market fund, but would be used in conjunction. If you felt like you wanted to capture more of that size class returns.
Here is a comparison of IJJ vs. ITOT over the last year.
You can see, that it’s outperformed on a CAGR basis by over 10% and the max drawdown was much less. On the other hand, if you zoom out to a further timeline (The last ten years), ITOT has clearly beaten IJJ with returns. As the old saying goes, you can’t use the past to predict the future.
By tilting towards IJJ, you are making a bet that Value will outperform, that Mid-cap stocks will be better positioned coming out of a declining economic environment. ARE WE THERE YET????????
What stocks does IJJ hold?
Here are the top 5 holdings
- EQT 1.28%
- First Horizon Corp 1.08%
- Reliance Steel and Aluminum 1.07%
- Alleghany Corp 1.01%
- Medical Properties Trust 0.91%
A few more stocks it holds that you might have heard of:
- Owens Corning
- Knight-Swift Transport
- BJ’s Wholesale Club
- Casey’s General Stores
- Western Union
- US Steel
- XPO Logistics
- Harley Davidson
- Leggett & Platt
How Diversified Is IJJ
IJJ holds a total of 297 stocks. A total market ETF has over 3000. So, almost 300 stocks to accurately capture the mid-cap size factor.
A sector breakdown of IJJ’s holdings
- Industrials 18%
- FInancials 17%
- Consumer Discretionary 13%
- Real Estate 10.4%
- IT 10%
- Healthcare 6.9%
- Consumer staples 5.6%
- Utilities 5.9%
One thing you are getting with this ETF that you aren’t getting with your typical total market ETF is a greater exposure to industrials. Financials also make up a much bigger portion. This is partly why it pays a bigger dividend than your standard total market ETF.
One of my favorite tools to compare ETF’s or compare them to the market is the ETF overlap scan.
A few things of note: 8% of ITOT is contained in IJJ. 100% of IJJ is in ITOT, just not to the extent we want. The total market is 15% more heavily weighted towards tech and 8% more tilted towards healthcare. So, it is not only a play on size, but a play on sectors to some extent.
Some Quick stats for IJJ
Year to date performance of IJJ
YTD RETURN versus ITOT (I shares Total Stock Market ETF)
IJJ is down only 5.45%
ITOT is down 14.73%
Pretty amazing to see how tilting towards Mid-Cap Value would have saved you almost 10% in losses. At the same time, this could change as the year goes on. If the interest rates cool, then you might see large-cap growth stocks start to climb again.
Current Dividend Yield
The dividend yield of ITOT is 1.27% for comparison. So, the dividend isn’t huge, but it is slightly better than a total market ETF. At this point, no one is really buying a diversified ETF like this for a dividend anyways. Even during this time of rising interest rates, you are doing good to get a 2% yield out of most basic ETF’s.
The current expense ratio for IJJ is 0.18%. Is that the best? No, but it is nowhere near the best either. I think this expense ratio is quite respectful.
Please consider looking over IJJ. It’s an interesting often overlooked area of the market.
Check out my post where I compare ITOT VS VTI