It’s no secret that the big tech stocks have racked up great returns in recent times. But for investors who think this theme may be overdone and want to pivot to opportunities beyond the usual suspects, there are plenty of promising choices in different segments of the market, such as the high-quality mid-cap stocks that the Invesco S&P MidCap Quality ETF (NYSEARCA:XMHQ) provides exposure to.
I’m bullish on this $4.4 billion ETF from Invesco (NYSE:IVZ) based on the impressive track record it has built over the past three- and five-year time frames. I’m also bullish because it goes well beyond the usual names to give investors exposure to a diverse group of stocks that are quietly establishing themselves as market winners.
Investment Methodology
According to Invesco, the fund’s sponsor, XMHQ invests in the S&P MidCap 400 Quality Index, “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 defines high quality as “companies that seek to generate higher revenue and cash flow than their counterparts through prudent use of assets and finances.”
XMHQ considers three factors when building its group of holdings: the companies’ returns on equity, accruals ratios, and financial leverage ratios.
XMHQ uses these three factors to create a quality score for each of the stocks within the S&P 400 MidCap Index and then invests in the top 80 stocks.
These 80 stocks are weighted by their quality score multiplied by their market cap, and stocks with higher scores “receive relatively greater weights.” The mid-cap stocks in the fund currently have market caps ranging from $3.0 billion to $20.1 billion. It’s a relatively complicated investment process, so let’s see how it plays out in real life in the next section.
Market-Beating Performance
XMHQ’s strategy of investing in high-quality, mid-cap stocks has made it a long-term winner. As of February 29, XMHQ has produced a three-year annualized return of 13.5% and an even more impressive five-year annualized return of 17.3%. XMHQ’s results beat those of the broader market over both time frames. For comparison, as of the same date, the Vanguard S&P 500 ETF (NYSEARCA:VOO) produced an annualized return of 11.9% over the past three years and 14.7% over the past five…
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