GRPM: GARP, Mid-Cap Discretionary Focused (NYSEARCA:GRPM)

Mid-caps, to put it simply, need more love. Everyone has been so enamored with the large caps, and speculators are trying to catch the small cap momentum (which doesn’t want to stay). Mid-caps though? It deserves more attention. Mid-cap funds tend to have much lower concentration risk than large-cap passive benchmarks and have no the same fundamental risks that smaller companies tend to face. If you’re a fan of mid-cap growth at a reasonable price, then you might want to consider the Invesco S&P MidCap 400 GARP ETF (NYSEARCA:GRPM). This fund takes a new approach to mid-cap investing, combining growth with a value overlay.

GRPM tracks the S&P MidCap 400® GARP Index. The index tracks the top 60 growth stocks in the S&P MidCap 400® Index, selecting those with high quality and value composite scores. This method gives investors the chance to invest in mid-cap companies that could they are growing but reasonably priced from a fundamental perspective. GARP as a style is ultimately about trying to find companies that are growing earnings above market rates but don’t have crazy high valuations. And frankly, it should matter a lot more going forward given the valuations of some of the biggest “market” players today.

A look at holdings

When we look at the top holdings, we see that the largest position is 4.04% of the fund. There is no major concentration risk to speak of.

What do these companies do? Lantheus Holdings Inc is a key player in the radiopharmaceutical industry. The company develops, manufactures and sells cutting-edge diagnostic and treatment products. Roivant Sciences Ltd is a biopharmaceutical company. Kinsale Capital Group Inc runs a specialist property and casualty insurance business. Hancock Whitney Corp offers a variety of banking, investment and wealth management services. And Autonation is a leading car seller in the United States.

Holdings like these along with others result in a portfolio that has a price-to-earnings ratio of just 13.76x. Growth at a reasonable price for sure here.

Sector weightings and portfolio composition

The Consumer Discretionary sector is the largest allocation, with nearly 27% of the fund, followed by Energy and Industrials 2.^when and 3^st. I will say that I think it’s important for investors to consider valuations when it comes to discretionary stocks, especially when considering credit card delinquency at this point in the cycle and credit card debt that at some point , could have a negative impact on these companies and theirs. evaluations as a result.

Notice that Tech is just under 10% of the fund. I like this. It offers a different mix than what you get from large-cap funds with a GARP slant.

Peer comparison

A fund worth comparing to GRPM is the SPDR S&P 400 Mid Cap ETF (SPMD). This is more of a broad proxy for the mid-cap space. GRPM focuses on Consumer Discretionary, Industrials and Energy. On the other hand, SPMD tends to focus on industrials and financials as the fund’s top 2 sectors. When we look at a price ratio of GRPM to SPMD, we see that GARP’s tilt has clearly led to quite a strong performance over several years. The dynamic nature of the fund’s positions based on fundamentals could explain why it performs so well as sectors move into and out of favor. The performance here is really heartening to see.

Pros and cons

In addition, GRPM gives you access to mid-cap companies that strike a balance between growth potential and stability. The fund’s growth at a reasonable price approach seeks to find companies that exhibit consistent fundamental growth and strong financial health. Also, GRPM’s expense ratio of 0.35% holds up well against similar funds.

However, investing people should keep in mind that GRPM’s performance can go up and down a lot. While there is clearly less risk of concentration in the top 10 holdings than we currently see in large-cap stocks such as the S&P 500, the very nature of these mid-cap companies means that these companies will be more cyclical and vulnerable to economic recessions. And if we do happen to end up in a recession next year, the Consumer Discretionary tilt would clearly be a net negative, independent of overall valuations.

Conclusion

Overall, a good fund. I like the price-to-earnings ratio, the mix of stocks, the sector composition being different from large-caps, and the market cap that the fund plays. I think it’s worth considering a rotation here, away from the big caps, and I’d consider this a staple of a portfolio. You just need to keep in mind the discretionary tilt the fund has for consumers.

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