iQ S&P SMid Cap Efficiency Model

INVESTMENT OBJECTIVE

The iQ S&P SMid Cap Efficiency Model seeks to outperform the S&P 500 index by selecting 20 stocks based on Capital Efficiency and Volatility-adjusted Plow Back Ratio.

PROCESS

The iQ S&P SMid Cap Efficiency Model selects its holdings based on the following rules-based investment process:

  • Starting Universe = The S&P 400 Mid Cap  and S&P 600 Small Cap indices (1,000 companies)

  • Sort the 1,000 companies by Share Buyback Ratio* and Value to Earnings Momentum and select the top 300.

  • Sort the remaining 300 companies by volatility-adjusted Plowback Ratio* and select the top 20 stocks

This model reconstitutes the first trading day of each February.

Why invest in SMID-cap stocks?

SMID-cap (small and mid-cap) stocks represent companies with market capitalizations that fall between small-cap and mid-cap ranges, typically ranging from $2 billion to $10 billion. There are several reasons why investors might consider investing in SMID-cap stocks, including:

1. Growth potential: SMID-cap companies have the potential to grow faster than larger, more established companies. Because they are not as widely followed by analysts and investors, their potential for growth may be overlooked, creating opportunities for investors.

2. Diversification: Adding SMID-cap stocks to a portfolio can provide diversification benefits. SMID-cap stocks can be less correlated with large-cap stocks, and can provide exposure to different sectors and industries.

3. Market inefficiencies: SMID-cap stocks are often less widely covered by analysts and institutional investors than larger-cap stocks, which can create market inefficiencies and mispricings. This can create opportunities for active investors to find undervalued or overlooked companies.

4. M&A activity: SMID-cap stocks can be attractive targets for mergers and acquisitions, which can provide a potential catalyst for stock price appreciation.

It is important to note that SMID-cap stocks are generally considered to be riskier than large-cap stocks and may experience greater volatility.

*The buyback ratio is the amount of cash paid by a company for buying back its common shares over the past year, divided by its market capitalization at the beginning of the buyback period. The buyback ratio enables analysts to compare the potential impact of repurchases across different companies.  Plowback ratios indicate how much profit is being reinvested in the company rather than paid out to investors.