Mid-cap stocks occupy an unusual position in portfolio construction. Too large for the explosive early-stage growth of small caps, too small for the stability and analyst coverage of mega-caps, they’re often overlooked despite historically delivering stronger long-term returns than both. Invesco S&P MidCap Quality ETF (NYSEARCA:XMHQ) attempts to refine this space further by filtering for quality—companies with strong balance sheets, profitability, and return on equity—but does that screening actually deliver better results for investors?
The ETF’s Intended Portfolio Role
XMHQ is designed for investors who want mid-cap exposure without the volatility and operational risk that often accompanies smaller companies. The fund tracks the S&P MidCap 400 Quality Index, selecting companies based on three quality metrics: return on equity, accruals ratio, and financial leverage. This screening process narrows the universe to 100 holdings that have demonstrated consistent profitability and financial discipline.
The portfolio reflects where quality companies cluster in today’s market. Industrials (23.8%) and Healthcare (21.3%) dominate—both sectors where established mid-caps can generate steady cash flows and maintain competitive advantages. The fund charges a competitive 0.25% expense ratio for this factor-based approach, though the modest 0.46% dividend yield signals these companies prioritize reinvestment over immediate income.
The top position, Illumina (NASDAQ:ILMN) at 4.02%, demonstrates active stock selection rather than market-cap weighting. This concentration reflects the fund’s quality-first approach, prioritizing financial strength over index representation.
The return engine is straightforward: mid-cap companies with proven profitability and manageable debt should compound earnings more consistently than the broader mid-cap universe. Quality screens historically protect during downturns while participating in recoveries, making this a core holding rather than a tactical trade.
Does It Deliver?
Over the long term, the quality factor has proven its worth. XMHQ has delivered 283.58% total returns over ten years, meaningfully outperforming both the S&P 500 and the broader mid-cap index. This demonstrates that screening for financial strength adds real value over time, rewarding investors who prioritize balance sheet quality over pure market-cap exposure.
Recent performance reveals the cyclical nature of quality investing. XMHQ returned 7.46% over the past year, trailing both large-cap and broad mid-cap benchmarks. This underperformance reflects a market environment that rewarded momentum and speculative growth over balance sheet strength—exactly when quality factors typically lag but provide downside protection.
The early months of 2026 suggest a potential shift. XMHQ is up 4.75% year-to-date while the S&P 500 has remained essentially flat, indicating the quality factor may be reasserting itself as markets rotate away from mega-cap tech concentration.
The Tradeoffs
Quality screening eliminates high-growth but financially unstable companies, which means XMHQ will underperform during speculative rallies. The fund’s minimal exposure to Communication Services (0.0%) and underweight in technology also means it misses momentum-driven sectors entirely. Additionally, the top holding Illumina carries significant stock-specific risk despite meeting quality criteria.
XMHQ works as a 10-20% core allocation for investors who want mid-cap growth with less downside volatility than the broad mid-cap index, but anyone expecting it to keep pace with large-cap tech during bull markets should temper expectations.
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