CONTRIBUTORS
Ahmed Farooq, CIMA, CFP
Head of Retail ETF Distribution,
Franklin Templeton Canada
Is it finally time to invest in mid-cap stocks? It’s a question I’m hearing frequently, and it’s a conversation I’m having on a regular basis within both the advisor community and the ETF analyst community.
There’s a buzz among advisors about cashing in on large-cap profits and seeking fresh growth prospects in the US markets for improved diversification. This is partly driven by a growing notion that mid-caps may be ready to meet the moment, which is a sentiment being echoed by industry analysts contemplating the market’s next best growth opportunity.
Part of the buzz can be attributed to Trump’s ‘America First’ platform. Proposed corporate tax cuts and tariffs could easily ignite mid-cap stocks by boosting domestically run companies over multi-nationals. While this is a promising development on its own, there are more strategic reasons to consider mid-caps in today’s changing market.
So why are US mid-caps attractive?
US mid-cap companies by market capitalization are companies between $2 billion USD and $10 billion USD. To give you a sense of the scope of the American mid-cap market, when compared against other countries, US mid-cap stocks are larger than the total market capitalization of Canada and the UK.1 This speaks to just how broad the opportunity set is in the US space.
Let me dive into three reasons why it is a good idea to invest now:
- Growth Potential: Mid-cap stocks sit in the sweet spot between the stability of large-cap stocks and the growth potential of small-cap stocks. Mid-cap stocks are generally more established and have more access to capital than small-cap companies, but still have significant room to expand and are often overlooked. If the economy continues to recover or grow, mid-caps could see strong revenue and profit growth, offering an attractive return.
- Valuation Opportunities: Mid-cap stocks are currently undervalued, Bloomberg is showing mid-caps at 22% cheaper P/E versus large-cap stocks, trading at 16x expected earnings vs. 22x of the S&P 500.2 Investors may be able to purchase stocks in growing companies at more reasonable prices, which could lead to substantial gains if those companies perform well in the future.
- Market Flexibility: Mid-cap stocks are often more nimble than large-cap stocks, meaning they may have the ability to adapt to changing market conditions more quickly. Mid-cap indexes generally exhibit greater sector diversification compared to the S&P 500, which has a higher concentration in a limited range of sectors, with technology representing over 30% of the index.3 Additionally, mid-caps stocks tend to have strong balance sheets to help weather the storm during uncertain times.
An easy way to get US mid-cap exposure.
Today I wanted to introduce you to FMID – Franklin Templeton’s new Franklin U.S. Mid Cap Multifactor Index ETF. This new strategy piggybacks on the success of our US mandate, which is a 5-star Morningstar rated mandate with $1.4 billion USD in assets4. The management fee of FMID 30bps and is designed to capitalize on the surge in mid-caps by using a strategic and multifactor approach that emphasizes Quality, Value, Momentum, and Low Volatility factors.
I invite you to learn more about what makes FMID such a unique offering, as you consider the best ways to position your portfolio for the next wave of growth in a changing market.
Please reach out to either myself or your local Franklin Templeton sales person to learn more about FMID.
Footnotes:
- Source: MSCI, FTSE, Bloomberg L.P. as of December 31, 2024. Chart is based on index market capitalization of S&P Global BMI and S&P Composite 1500 component indices.
- Bloomberg L.P. as of December 31, 2024.
- Source: S&P Dow Jones Indices as of December 31, 2024.
- Source: Morningstar Research as of January 28, 2024. The US mandate refers to Franklin U.S. Mid Cap Multifactor Index ETF (FLQM), which is not available for sale in Canada. While the Canadian version uses a similar investment process to that of the U.S. Fund, the returns of the Canadian version, Franklin U.S. Mid Cap Multifactor Index ETF(FMID), may differ from that of the U.S. version, Franklin U.S. Mid Cap Multifactor Index ETF(FLQM), due to a variety of reasons including portfolio size, regulatory requirements and differences in fees and expenses.
Franklin Templeton Canada is a business name used by Franklin Templeton Investments Corp.
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
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