The ETF Show - The Benefits of Mid-Caps In Recovery Markets

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  • 06 mins 38 secs
Todd Mathias, CFA, Vice President, Head of U.S. ETF Product Strategy & Development discusses the benefits of including mid-caps can play in a recession recovery market and Franklin Templeton’s Franklin U.S. Mid-Cap Multi-factor Index ETF, ticker FLQM.
Channel: ETF
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Jonathan Forsgren: Welcome to this edition of the ETF show, joining us today to discuss the role midcaps can play in a recession recovery market and Franklin Templeton's Franklin US MidCap Multi Factor Index ETF f l Q. M is Todd Mathias, head of US ETF product strategy and development. Todd, Thank you for joining us. Thanks, Jonathan.Given the amount of global market uncertainty, how have you seen clients evaluate allocation decisions with inequity?

Todd Mathias: Yeah, so we've actually had a lot of recent client conversations around the breakdown of the 60 40 portfolio last year. Um, and interestingly enough, clients aren't necessarily looking to break down that 60 40. But look within each segment of the of the market potential opportunities for repositioning and when they've looked within their equity segment of the market, a lot of these investors have realised that they're over allocated to US large cap equity.

When you actually look at the data, the large cap segment of the market is actually eight times the size of the MidCap segment based on morning star data. And given the fact that you have these over concentrations and these really large names in large cap, I think investors are looking for the potentially diversifying impact that midcap can have on the overall market or on the overall portfolio. So clients have actually looked what type of diversifying impact midcaps can have.

When you look at the large cap counterparts, they tend to be more susceptible to global downturns. Currency fluctuations Just given the multinational nature of a large cap equity security when you actually look at who's made a strategic investment in midcap a lot of time. That's because of the faster growth prospects that Midcap can offer over large cap or a lower risk profile relative to small cap. And when you look at the data, if you go back to the year 2000 into the end of last year, a MidCap Index has actually outperformed a large cap by 100 and 50% cumulative. So we actually think a strategic allocation of MidCap can be diversifying and can benefit if, uh, an investor over the long term.

Jonathan Forsgren: And why are midcaps particularly attractive right now?

Todd Mathias​​​​​​: Yeah, I mean, if you're reading the news daily, it's Is it hard landing? Is it soft landing? No landing? Are we in a banking crisis? I think a lot of investors are worried about the the oscillation in the current market environment. Looking, How can I posture my portfolio but not miss these quick rebounds like we're having over the past couple of weeks?You go back to the 19 seventies and look at all the recessionary periods Midcap has actually done quite favourably, um, not only in a recession, but coming out of a recession. You actually look at the past two recessionary periods being the dot com crisis as well as the global financial crisis.

MidCap actually outperformed its, uh, large cap as well as its small cap counterparts. So it can be an attractive allocation for those that are concerned about the recessionary environment but still want to participate in those strong rebounds.

Jonathan Forsgren: And what is it about the ETF structure that can be beneficial in particular to midcap investors?

Todd Mathias:: Yeah, Jonathan, it might be intuitive, but, you know, as large caps get larger, they stay in the large cap segment of the market for midcaps. As they get larger for an index, they're gonna gravitate in the into the large cap index, meaning you're gonna have some forced turnover there. You'd see the same thing for active managers in the midcap area of the market where, you know, they don't want to be, um, having any sort of style drift within their portfolio. So they're also gonna, on average, have higher turnover than their large cap counterparts. We took a close look at the Morningstar data,and over the past five years, um, open end mutual funds have actually paid to gain 82% of the time, while ETF s only 1% of the time. This really has to do with the ETF structure. Operationally, they're set up to mitigate or lower capital gain distributions. Really meaning that or the tax aware or tax sensitive investor, the ETF can be a really critical tool for their portfolio allocations.

Jonathan Forsgren: And we know that ETF S can be active or indexed. So what about F l Q M? Being a rules based index fund makes it a compelling offering.

Todd Mathias: Yeah, Jonathan, so F. L Q M is our multifactor ETF offer here at Franklin Templeton. You know, it's a strategy that's rules based, something that's become more popular for investors that are really focused on a strategy that can deliver a specific objective or outcome within their portfolio. Um, the product is actually rooted in fundamental analysis to tilt towards high quality securities that are also fair or attractively valued. It helps, uh, investors that are seeking to mitigate drawdowns or participate more fully in upward trending.  Um, currently, it is a five star morning star rated product, um, one of only five within the MidCap ETF. A blend category. Uh, its current positioning is overweight in industrials as well as consumer sectors, um, parts of the market that have demonstrated higher quality in in nature while underweighting financial utilities and rates, which tend to be a bit more interest rate sensitive. And so overall, we feel that, you know, MidCap is an area that tends to be overlooked. It can offer some diversifying effects for a portfolio allocation. Those who are potentially looking at the recessionary impacts but want to be able to participate more fully on that up swing could benefit from a midcap allocation, um, particularly in an ETF for those that are a bit more tax aware. So we'd encourage those that are looking for that specific objective or an outcome for their portfolio to consider. S L Q M

Jonathan Forsgren: Well, Todd, thank you very much for joining us today.

Todd Mathias: Thanks, Jonathan.

Jonathan Forsgren: And to our viewers. Thanks for watching for asset TV. I'm Jonathan for we'll see you next time.

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