In our previous blog posts, we introduced two of the best performing mid-cap ETFs: COWZ, a mid-cap value ETF focused on strong free cash flows and XMHQ, a mid-cap blend ETF focused on high quality mid-cap companies.
Today we will have an in-depth look at the comparison between these two excellent investment options for those who are interested in going beyond the obvious for long-term growth and capital appreciation.
What?
COWZ (Pacer US Cash Cows 100 ETF) and XMHQ (Invesco S&P MidCap Quality ETF) are two of the best-performing mid-cap ETFs in their categories.
COWZ:
Category: Mid-Cap Value
Inception: 12/16/2016
Objective: Targets companies with high free cash flow yield.
Strategy: Invests in undervalued firms generating significant cash flow.
Benefits: Seeks to offer potential high returns by identifying financially healthy companies that can sustain growth and profitability.
XMHQ:
Category: Mid-Cap Blend (mix of Growth and Value)
Inception: 12/1/2006
Objective: Tracks mid-cap companies with strong quality characteristics.
Strategy: Focuses on high return on equity, stable earnings growth, and low financial leverage.
Benefits: Aims to provide stability and consistent performance by selecting financially sound companies.
So What?
Performance
Since COWZ launched in late 2016 with less than 10-years of history, let's take a look at the performance for the past 5-years for comparison purposes.
It is interesting to note that XMHQ outperformed after the COVID crash and COWZ performed better from mid-2021 to Jan 2024. Since then XMHQ performed better than COWZ. The faster rebound of XMHQ post pandemic crash may be due to the fact that XMHQ is a blend ETF w/ more growth oriented companies than COWZ, which is a mid-cap value ETF.
Just FYI, the S&P 500 peaked around Dec 2021 and had a downturn until Dec 2023. It is very interesting to note that COWZ remained mostly flat during this downturn while XMHQ suffered a similar downturn like the S&P 500. This is the strength of COWZ by focusing on the companies with the strongest free-cash flows even during the market turns. You can also note that XMHQ and COWZ can be complementary and potentially lower the volatility of your portfolio during the down markets, which will definitely come from time to time.
Dividends
The table below shows the dividends comparisons since 2017 (COWZ's inception was 12/16/2016).
Currently, COWZ has a higher TTM (Trailing Twelve Months) dividend yield of 1.88% compared to XMHQ's 0.6%. COWZ delivered higher dividend yields for all years since 2017. This is due to the fact that COWZ is focused on companies with the highest free cash flows, which is a significant indicator of a company's financial health. Therefore, such companies tend to have a strong capability to sustain higher dividend payments.
Now What?
Choosing between XMHQ and COWZ depends on your investment preferences and risk tolerance:
If you value stability and income:
COWZ might be the better choice. It focuses on mid-cap value stocks with highest free cash flow yields, offering lower volatility, lower drawdowns, and higher dividend payouts. This makes COWZ suitable for investors seeking relatively steady, yet higher dividend income while reducing portfolio risk during market downturns.
If you're looking for a blend of growth and value:
XMHQ could be more appealing. It includes a mix of growth and value mid-cap stocks, providing potential for higher capital appreciation. This ETF is ideal for investors who are comfortable with some volatility for the chance of higher returns.
Or, consider both for diversification:
Combining XMHQ and COWZ can help reduce the volatility of XMHQ with the stability and income from COWZ. This strategy offers a balanced portfolio with potential for growth and consistent income.
Concluding Remarks
Both XMHQ and COWZ offer unique advantages tailored to different investment strategies. XMHQ provides a balanced approach with potential for growth, while COWZ delivers stability and higher income through dividends. Additionally, combining both ETFs in your portfolio can offer diversification benefits, reducing volatility and providing a blend of growth potential and consistent income. Assess your financial goals and risk tolerance to choose the right ETF that best aligns with your investment needs, or consider using both to achieve a more diversified and resilient portfolio.
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