I’ve been very vocal about the idea that I suspect we see two rotations this year. The first is out of large into mid and small-cap stocks. The second is out of growth and into value. Large-cap growth has been such an outperformer that mean reversion should, I believe, kick in and cause other parts of the marketplace to relatively perform better. If you are of the same mindset, then the iShares S&P Mid-Cap 400 Value ETF (NYSEARCA:IJJ) may be worth considering.
The iShares S&P Mid-Cap 400 Value ETF is a passively managed ETF that tracks the investment results of the S&P MidCap 400 Value Index. Launched on July 24, 2000, IJJ aims to provide exposure to mid-cap U.S. stocks that are considered undervalued by the market relative to comparable companies. The ETF is sponsored by BlackRock, one of the world’s leading asset management firms.
IJJ’s Investment Objective
The primary investment objective of IJJ is to track the performance of an index composed of mid-capitalization U.S. equities that exhibit value characteristics. This means the ETF invests in companies that are thought to be undervalued by the market relative to their intrinsic worth. These companies usually have lower price-to-earnings (P/E) and price-to-book (P/B) ratios. The ETF seeks to provide low-cost, tax-efficient exposure to these companies, making it an excellent complement to a portfolio’s core holdings.
Holdings of IJJ
IJJ has a diversified portfolio, with 300 holdings. No stock makes up more than 0.97% of the portfolio. The low weightings are a big plus in my view as it takes away the possibility of a few companies largely driving the performance. The positions, because they tilt value, help the portfolio to have a price-to-earnings ratio of 15.2x and a price-to-book ratio of 1.65.
Sector Composition of IJJ
The top three sectors are Financials, Industrials, and Consumer Discretionary. Here’s where it might get tricky. It’s not clear if we are fully out of the regional bank crisis that began last year, and the Financials sector outside of the very large companies has largely languished. That’s not necessarily a bad thing, as it further cements the value tilt. It’s just not clear how much risk remains in the Financial sector at this point.
Peer Comparison
IJJ has two direct competitors that track the same underlying index: the SPDR S&P 400 Mid Cap Value ETF (MDYV) and the Vanguard S&P Mid-Cap 400 Value ETF (IVOV). While these ETFs have similar objectives and holdings, there are subtle differences in their performance, fees, and liquidity. IJJ has performed the worst of the three, but the differences are minimal. I’m not sure there’s a compelling reason to choose one over the other. The fee on IJJ is 0.18%, MDYV is at 0.15%, and IVOV is at 0.15%. On fee alone, it’s worth considering MDYV or IVOV over IJJ.
Pros and Cons of Investing in IJJ
Like any investment, investing in IJJ comes with its set of pros and cons. On the upside, IJJ offers exposure to mid-cap stocks that are considered undervalued, providing potential for significant returns. It’s also a low-cost and tax-efficient way to access a diversified portfolio of stocks. However, like all investments, IJJ comes with risks. The biggest risk is in Financials being the top sector of not just IJJ but the value style in general. If the regional bank crisis remains in place, it likely will be a headwind for mid-cap value for some more time.
Conclusion: Should You Invest in IJJ?
The iShares S&P Mid-Cap 400 Value ETF can be a good addition to your investment portfolio if you’re looking to diversify your investments and gain exposure to mid-cap U.S. stocks that are thought to be undervalued. But there’s no real edge to this over ETFs like MDYV and IVOV which have a lower fee and slightly better performance while still tracking the same part of the market. It’s not a bad fund, it just doesn’t have a clear edge against competitors.
Markets aren’t as efficient as conventional wisdom would have you believe. Gaps often appear between market signals and investor reactions that help give an indication of whether we are in a “risk-on” or “risk-off” environment.
The Lead-Lag Report can give you an edge in reading the market so you can make asset allocation decisions based on award-winning research. I’ll give you the signals – it’s up to you to decide whether to go on offense (i.e., add exposure to risky assets such as stocks when risk is “on”) or play defense (i.e., lean toward more conservative assets such as bonds/cash when risk is “off”).