New York-based Capital Group launched a U.S.-focused small/midcap exchange-traded fund strategy Thursday, which is also the ETF issuer’s first entry into the space.
The Capital Group U.S. Small and Mid Cap ETF (CGMM) is an actively managed U.S-focused fund that will be helmed by principal investment officer Roz Hongsaranagon, who also manages the Capital Group Global Growth Equity ETF (CGGO), along with three other named managers.
The fund’s expense ratio is 0.51% annually and will be benchmarked to the Russell 2500 index. The initial holdings are overweight financials, consumer discretionary, and consumer staples versus the Russell 2500 and underweight healthcare, energy, and real estate.
Capital Group has now amassed $50 billion in AUM and 22 ETFs since its initial foray into the ETF ecosystem three years ago, and claims to be the fifth-largest issuer of active ETFs.
Capital Group Takes Leap With Small/Midcap Strategy
While the firm has run global smallcap mutual funds, a domestic small/midcap strategy is new for the fund issuer, and it was created specifically as an exchange-traded fund, partially in response to advisors, said Scott Davis, head of ETFs for Capital Group. CGMM completes the issuer’s suite of core building block ETFs, enabling the firm to launch its all-Capital Group ETF models, slated for March.
Capital Group’s new ETF puts it in competition with established, popular, value-tilt smallcap ETFs from American Century Investors (AVUV) and Dimensional Holdings (DFAS). CGMM is designed to fit a core-to-core-growth strategy balanced between small and midcaps. Davis said what also sets it apart is Capital Group’s structure, in which all managers and analysts choose their top holdings for the portfolio.
The company also plans to keep market cap limits on holdings, selling them once they start to outgrow the midcap label.
It’s no secret that the smallcap space has underperformed large caps for years. Launching a new fund when valuations are low can reap benefits when cycles turn, but it can be hard to convince investors to buy underperforming funds. Flows often follow performance, so fund issuers have to balance these competing factors. Davis said Capital Group focuses on the long term when it issues new funds.
“We really do come to market with strategies where we know we can offer something durable and something that will benefit clients, he said. "So, I wish I could tell you that we were smart enough to be able to time these things, but really, that's not how we approach it."