Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some profitable mid-cap stocks to your portfolio but don't have the time or expertise to hand-pick a few, the WisdomTree MidCap Earnings ETF (EZM 0.76%) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously. It zeroes in on profitable mid-cap stocks by removing the 500 largest companies from an index of U.S. stocks and then focusing on the largest ones with at least four quarters of positive earnings.
The basics
ETFs often sport lower expense ratios than their mutual-fund cousins. This ETF, focused on profitable mid-cap stocks, sports a relatively low expense ratio -- an annual fee -- of 0.38%.
This ETF has performed well, outstripping the S&P 500 over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why profitable mid-cap stocks?
Mid-caps can be wonderful additions to portfolios because they've proven themselves to some degree, having grown to mid-cap size, but they also have a lot of room to grow. And profitable mid-cap stocks have already demonstrated the viability of their business.
More than a handful of profitable mid-cap stocks performed well over the past year. Genworth Financial (GNW +0.68%), for example, surged 137%, in part on second-quarter results that featured earnings up 86% and strong performance from its mortgage insurance business. Revenue dropped 1.3%, though, and lagged compared to expectations. Genworth has been cutting costs, it has raised its rates, and it's poised to benefit from a rebound in housing, as it insures mortgages. Some worry, though, that tightening lending standards may result in less need for its insurance. Genworth stock looks appealing with its forward P/E ratio recently under nine. Some would like to see its dividend resumed.
Huntsman (HUN 2.80%) gained 44%, and it does offer a dividend yielding 2.3%. The diversified chemical company got a boost on announcing its planned acquisition of Rockwood Holdings' titanium dioxide pigments business, but some don't like the volatility of the titanium dioxide business -- an oversupply of pigment whacked the company's earnings recently. Huntsman plans to spin off its pigments business, though, and bulls like its investments in, and the prospects fo,r its polyurethanes business.
Other profitable mid-cap stocks didn't do quite so well over the last year, though their fortunes could change in coming years. SandRidge Energy (NYSE: SD) shed 17% and recently traded below $6 per share, leading some to wonder whether it's now a bargain. Focused on the Mississippi Lime and Gulf of Mexico regions, the company has been improving its performance on many counts, such as declining well costs. When posting its latest quarterly results, management also upped its production projections. Some think SandRidge might end up acquired; until there's an announcement, however, that's just speculation.
Cliffs Natural Resources (CLF 2.43%) sank 48%, struggling in a weak coal market. Analysts at Credit Suisse trimmed their expectations for the company last month due to low iron-ore prices and the company's rising debt level. Debt is especially worrisome when a company is having a hard time staying free-cash-flow positive, and it's no surprise that Cliffs is heavily shorted. Bulls, though, were heartened this summer when Cliffs' CEO noted that iron ore inventory levels in China have been near multiyear lows, and the Chinese economy is showing signs of heating up. Cliffs does sport a 2.8% dividend yield, but it's no stranger to dividend cuts.
The big picture
It makes sense to add profitable mid-cap stocks to your portfolio. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in it, and profiting from it, that much easier.
