How Active ETF TMSL Limits Concentration Risk

The S&P 500 has grown more than 17% YTD, but is that rise deceptive? A significant amount of that growth owes to just a few key names. Those include the usual mega-cap tech firms like Apple (AAPL) and Microsoft (MSFT). Concentration risk like this can bee seen in indexes across all market capitalization sizes, including small-cap and mid-cap stocks. In fact, concentration risk poses an even larger liquidity challenge to small-cap and mid-cap index portfolios. In a market also threatened by continued rising rates, stubborn inflation, and a still-looming recession risk, finding the right ETF matters. The right active ETF can help mitigate that concentration risk while moving nimbly across opportunities.

Why go active? An active ETF comes with inherent advantages amid uncertainty. Its managers can lean on serious professional experience and their own track records. Meanwhile, they can adapt more quickly than investment committee-directed passive strategies. In this case, however, challenged by concentration risk, active strategies can have a particularly strong impact.

See more: How Active ETFs Can Navigate the “September Effect

While considering a stock with a bottom-up perspective, active flexibility can also consider whether an ETF portfolio may be too concentrated. Even better, perhaps, could be a strategy with an inherent focus on areas that end up less concentrated. The active ETF TMSL, the T. Rowe Price Small-Mid Cap ETF, builds a small and mid-cap portfolio that has the flexibility to navigate across both growth and value styles. TMSL considers stocks based on factors like relative valuation, profitability, stability, earnings quality, and more.

TMSL has just 34.6% of its assets in the top fifty stocks compared to 50.6% for its Factset Segment Average. That compares well to larger, passive strategies often seeing 100% of their assets in the most popular investments. TMSL has, in turn, returned 2.3% since it launched in June, charging only 0.55% (55 basis points) for an actively managed strategy.

TMSL’s approach can position it to do well should markets pull off a soft landing, too. Smaller cap firms with strong fundamentals could outlast the lagging impact of rate hikes before benefitting from future cuts. By combining an approach that limits concentration risk with a focus on fundamentals in firms with lots of potential, TMSL could be the active ETF to watch in its space for the months ahead.

For more news, information, and analysis, visit the Active ETF Channel.