CONTRIBUTORS
Alex Lee, CFA, CAIA, MFin
Head of Canada ETF Product Strategy
Franklin Templeton Canada
Happy New Year! With another festive season behind us, Bobby and I are ready for another year of studying the markets and providing timely analysis. So, let’s get back to the grind, and dive into our topic of the day – US equities.
The US equity market delivered another remarkable performance in 2024, with the S&P 500 Index closing the year up 25.0% in US dollar (USD) terms. Once again, the Magnificent (Mag) 7 stocks were pivotal in driving returns, accounting for more than half of the S&P 500 Index’s performance.
These mega-cap leaders have been at the forefront of transformative innovations, particularly in AI. This has driven robust earnings growth and bolstered their dominant market positions, while underscoring the crucial role that innovation-driven growth plays in shaping the equity landscape. However, looking to 2025, investors are questioning whether the Mag 7 can maintain their leadership amid increasing scrutiny of valuations and concentration risk.
There is evidence to support a broader market rally in the coming year. Strong macroeconomic data and healthy corporate fundamentals suggest that US exceptionalism may persist, potentially expanding market participation beyond the mega-cap cohort. In this environment, there is a compelling case for selectivity, balancing exposure to core winners with opportunities across the broader market for a more resilient and diversified portfolio in the year ahead.
2024 US Sectors Performance Summary (USD)
Communication services led with a remarkable 40.2% gain, driven by standout performances from top weighted stocks in the sector. The technology sector also delivered solid results, while consumer discretionary continued its positive momentum from the prior year, bolstered by the ongoing strength of mega-cap growth stocks, albeit with slightly lower returns compared to 2023.
On an equal-weighted basis, financials and utilities led. There was also a notable difference in performance between the market cap weighted returns and equal weighted returns for a number of sectors, including technology, communication services, consumer discretionary and consumers staples.
Source: Morningstar Research Inc., as of December 31, 2024. All returns in USD as total returns. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
Core Strength, Selective Focus: FLUS’s Multifactor Advantage
The Franklin US Large Cap Multifactor Index ETF (FLUS), which I consider a Core Plus approach to the US equity market, is an excellent long-term solution for investors at only a 25-basis-point management fee.
At its core, FLUS provides exposure to some of the top stocks in the US equity market. The strategy also utilizes three key factors—quality, value, and momentum—to select and/or weight individual securities. I believe this multifactor approach provides the right checks and balances to enhance the potential for outperformance over a full market cycle by balancing risk and reward through various market environments.
There is no guarantee that any strategy will achieve its objective. FLUS is not a riskless investment, and investors can lose money. For additional risk considerations please see the prospectus.
Characteristics
The valuation for FLUS is more attractive than the Russell 1000 Index (Benchmark) based on price-to-earnings ratio, along with a higher return on equity.
Source: Franklin Templeton, as of December 31, 2024.
Performance
FLUS has demonstrated strong long-term performance since its inception. In March 2022, the underlying index methodology was modified to reduce tracking error relative to the Russell 1000 Index. Previously, for example, securities were capped at a 1% weight regardless of their strong factor scores, which made it difficult to match the benchmark when returns were driven by top-weighted stocks. Since the change, FLUS has been even better positioned to drive returns.
Cumulative Performance Since FLUS’s Underlying Index Modification (%)
Source: Morningstar Research Inc., as of December 31, 2024. All returns in CAD. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
We believe that these adjustments have made FLUS more compelling to own as a long-term solution. During the past three years, encompassing most of the period during which the underlying Index was modified, FLUS has generated alpha relative to both the S&P 500 Index and the Russell 1000 Index (Benchmark).
Source: Franklin Templeton and Morningstar Research Inc., as of December 31, 2024. Common Inception date is June 5, 2017. Time periods greater than one year are annualized.
Final Word
The US equity market remains the most competitive equity market in the world, with many companies vying for inclusion and weight in the index. The inclusion of the momentum factor and the quarterly rebalance allows FLUS to stay relevant amid changing market dynamics, ensuring that the portfolio remains aligned with prevailing market trends and core drivers, while still tapping into opportunities across the broader market.
FLUS Historical Style Breakdown
Source: Morningstar Research Inc., as of December 31, 2024.
IMPORTANT LEGAL INFORMATION
Alex Lee’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinion, and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
Commissions, management fees, brokerage fees and expenses may be associated with investments in ETFs. Please read the prospectus and ETF facts before investing. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. Performance of an ETF may vary significantly from the performance of an index, as a result of transaction costs, expenses, and other factors. Indicated rates of return are historical annual compounded total returns for the period indicated, including changes in unit value and reinvestment distributions, and do not take into account any charges or income taxes payable by any security holder that would have reduced returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
Franklin Templeton Canada is a business name used by Franklin Templeton Investments Corp.
© 2025 Franklin Templeton. All rights reserved.