The Alger Mid Cap 40 ETF (FRTY) has demonstrated impressive returns year-to-date in 2024, yet a deeper dive reveals a troubling history of extreme volatility and a consistent pattern of underperforming its benchmark since its launch. This ETF's investment strategy, heavily concentrated in a select number of high-growth companies, carries inherent risks. The portfolio's valuation, evidenced by a significant price-to-earnings premium compared to its benchmark, suggests that much of its future growth is already priced in. Should these ambitious growth projections fail to materialize, investors could face substantial downside.
A detailed examination of FRTY's asset allocation highlights several strategic choices that contribute to its risk profile. The fund heavily overweights sectors such as Communication Services and exhibits a bias towards large-cap stocks, despite its mid-cap designation. Concurrently, it entirely neglects key sectors like Materials, Real Estate, and Consumer Defensive stocks. This concentrated exposure, combined with the fund's high expense ratio of 0.60% and its historical track record of lagging behind more passively managed index funds, raises significant concerns about its suitability as a long-term investment. Consequently, current market conditions and the ETF's structural characteristics do not support a favorable recommendation for adding FRTY to an investment portfolio.
Many investors often focus their attention on either large-cap behemoths or nimble small-cap ventures, frequently overlooking the mid-cap segment. However, the mid-cap space offers a unique blend of growth potential and stability, distinct from both ends of the market capitalization spectrum. Earlier this year, several analyses explored various mid-cap ETFs, aiming to shed light on this often-neglected yet potentially rewarding area of the market. These discussions sought to provide a comprehensive understanding of the opportunities and challenges within mid-capitalization investments, contributing to a more balanced market perspective.
Considering the high valuations in the current market, coupled with FRTY's elevated expense ratio and its historical tendency to underperform simpler, passive investment vehicles, it is difficult to advocate for its inclusion in an investment strategy. Investors seeking exposure to the mid-cap segment may find more compelling and cost-effective alternatives elsewhere.