The Top 3 Mid-Cap Value ETFs for 2016 (VOE, IWS, JKI)

The Top 3 Mid-Cap Value ETFs for 2016 (VOE, IWS, JKI)

With increasing uncertainty and volatility creeping into the stock market as an interest rate hike appears probable in the near future, investors are looking for ways to access stocks with above-average growth potential while further minimizing risk exposure. One commonly used tactic is to shift one's portfolio focus more toward mid cap

 equities. Mid caps are a good "split the difference" option between the relative safety of large-cap stocks and the relatively higher growth potential of small-cap stocks. Another strategy for exposure to relatively high potential growth with reduced risk is investing in value stocks.

Investors can use exchange-traded funds (ETFs) to combine the two strategies through investing in mid-cap value-oriented ETFs. As of 2015, there are approximately a dozen of such ETFs to choose from. Mid-cap value ETFs offer investors exposure to a selection of equities with value characteristics, such as a low price-to-book or price/earnings ratio, factors that help minimize company-specific risk. Focusing on value stocks can have another advantage in the fact that a number of studies have found that over the long term, value stocks have actually produced better returns for investors, and with lower volatility, than riskier pure growth stocks.

Here are three of the most widely traded and best-performing mid-cap value ETFs that are likely to continue to perform well in 2016.

1) Vanguard Mid Cap Value ETF

The Vanguard Mid Cap Value ETF (NYSEARCA: VOE) was launched by Vanguard in 2006. This ETF, with over $4 billion in total assets, seeks to mirror the performance of the CRSP US Mid Cap Value Index that selects stocks according to five value factors, including price to book ratio (P/B), forward earnings to price, and dividend to price ratio. The fund holds the equities that make up the underlying index in the same proportion as they are held in the index. This ETF is appropriate for investors seeking broad exposure to mid-cap value equities with minimal expense, as it offers the lowest expense ratio of all the ETFs in this category.

This fund's heaviest concentration is in financial sector stocks, which make up nearly 20% of the fund's portfolio, followed by consumer cyclicals, technology and industrial. Major holdings include Hartford Financial Services Group Inc., Fidelity National Information Services Inc., ConAgra Foods Inc., Sigma Aldrich Corporation and WEC Energy Group Inc. The weighted average P/B ratio of the fund's holdings is 1.88. The fund's annual portfolio turnover ratio is comparatively low at 14%.

The Vanguard Mid Cap Value ETF has an extremely low expense ratio of only 0.09%. The category average expense ratio is 0.48%. The fund offers a dividend yield of 3.04%. The fund's five-year annualized return is 14.19%. Morningstar rates this ETF as carrying a below-average level of risk and offering high returns.

2) iShares Russell Mid Cap Value ETF

The iShares Russell Mid Cap Value ETF (NYSEARCA: IWS) was launched by BlackRock in 2001 and has nearly $7 billion in assets under management. The fund aims to reflect the price and yield of the Russell Midcap Value Index. The underlying index is designed to represent the overall performance of stocks that make up the mid-cap value segment of the U.S. stock market, based on P/B ratio and fundamental growth analysis. The fund is typically 90% or more invested in the equities contained in the underlying index. Up to 10% of the fund's assets may be invested in futures contracts, options or swap contracts, or in equities not contained in the benchmark index, but which the fund manager believes will help the fund more accurately track the performance of the index. This ETF is well suited for investors seeking broad mid-cap value exposure in an index fund that uses some flexibility in determining the component equities that the fund holds.