MDY: 5 Turns Cheaper Than The SPX, Mid-Caps Eye New Highs (NYSEARCA:MDY)

The valuation gap between large caps and mid-caps closed a bit over the final nine weeks of 2023, but a strong January showing from the biggest of the big stocks and generally soft returns from mid-size equities caused that gap to widen once more. Heading into February, and the bulk of mid-cap earnings season, there is a nearly five-turn valuation difference between the S&P 500 and the S&P 400.

I reiterate my buy rating on the SPDR S&P Mid-Cap ETF (NYSEARCA:MDY). I see it as a relative value compared to large caps and will later note key resistance on the chart.

S&P 400 MidCap Index P/E Considerably Less than that of the S&P 500

For background, MDY seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P MidCap 400 Index. The index and funds that track it provide investors with a benchmark for mid-sized companies, according to SSGA Funds.

SSGA is a large ETF with more than $20 billion in assets under management and it carries a low, but not ultra-cheap, 0.23% annual expense ratio. The fund’s dividend yield is lower than that of the S&P 500 at 1.2% as of January 30, 2024. Share-price momentum has been healthy lately, but there remains work to be done by the bulls to lift the ETF to new all-time highs. Risk metrics are not all that encouraging given the portfolio’s historical standard deviation metrics and an oddly high short interest percentage. MDY is very liquid, though, with a 90-day average volume amount of more than 900,000 shares while the ETF’s 30-day median bid/ask spread is just two basis points.

Digging into the portfolio, the 3-star, silver-rated ETF by Morningstar plots in the lower two-thirds of the style box. It’s important to note that by this measure, there’s actually ample small-cap exposure. There’s also diversity seen between the value and growth styles while 45% of the allocation is considered blend. With a price-to-earnings ratio of 15 and a long-term earnings growth rate of slightly higher than 10%, the PEG ratio is attractive at 1.5.

MDY: Portfolio & Factor Profiles

Where MDY differs from the S&P 500 is in its sector allocation. Industrials commands the highest weight at 20.0% while the Information Technology sector, about 29% of the SPX, is just 12% of the mid-cap index. This niche of the US stock market is quite cyclical and risk-on since Consumer Discretionary and Financials round out the top three sector weights.

MDY: Holdings & Dividends Information

Seasonally, mid-caps tend to rally into mid-February, but then endure a bout of volatility in the back half of the first quarter, according to data from Equity Clock. In the last 20 years, MDY has returned, on average, about 11%, though the performance from late April through late October has been somewhat weak. Seeking Alpha notes that February has produced an average return of 1.03% in the fund’s last 10 years.

MDY: Mixed Trends for the Balance of Q1

The Technical Take

With cyclical exposure and an attractive valuation on both an absolute and relative basis, MDY’s chart is not “all clear” quite yet. Notice in the graph below that shares remain under their all-time high from late 2021. The fund put in a double bottom around the $400 mark the following year, and the bulls have successfully defended the $425 mark while its long-term 200-day moving average gradually trends higher. I like that MDY rose through $500 – a mark that gave it fits on a pair of occasions last year. And just recently, the ETF held its rising 50-day moving average.

Also take a look at the RSI momentum oscillator at the top of the graph – it notched a new high around the turn of the year when the fund reached a nearly two-year high. That was encouraging, and this recent pullback looks like a bull flag to me. Finally, with a high amount of volume by price in the $425 to $505 zone, there should be plenty of cushion on pullbacks.

Overall, the chart has potential, but I would like to see a breakout to new highs above the $534 mark.

MDY: Shares Sneaking Up on All-Time Highs

The Bottom Line

I reiterate my buy rating on MDY. I see it as a compelling value, and price action has the potential to turn more bullish if we see the ETF resolve above the 2021 peak.