First Trust Active Factor Mid Cap ETF

AFMC

Market cap $177M

The $85 billion listing last month of SpaceX, Elon Musk's aerospace, satellite communications and artificial intelligence company, was an important market event. The company's dual-class share structure, conferring disproportionate voting power on its founder, could be expected to serve as a template for the next wave of high-profile IPOs, with OpenAI and Anthropic expected to follow suit in the coming quarters.

I initiate coverage on the First Trust Active Factor Mid Cap ETF, assigning a 'hold' rating due to cautious optimism. AFMC's multi-factor approach—value, momentum, quality, and low volatility—has recently outperformed IJH, especially by leveraging momentum. Despite a high 0.68% expense ratio and bid/ask spread, AFMC offers strong GARP characteristics with a top-decile modified PEG ratio.

AI-related equity jitters are unlikely to be resolved overnight and eurozone government bonds could actually come out as a winner. Relative to euro rates, US equity volatility is reaching highs similar to previous crisis periods. A global rebalancing of portfolios could see significant demand for euro rates, mitigating the upward rate pressure.

First Trust Active Factor Mid Cap ETF employs an actively managed, factor-based approach targeting mid-cap equities. While ahead of IJH in terms of quality, GARP characteristics, and performance, AFMC is meaningfully weaker than IVV both regarding factor mix and returns. AFMC is beating IVV this year, yet I believe the prospect of it outmaneuvering IVV consistently in the future is very low, as hinted by its historical returns.