Active ETFs and Mid-Cap Equities: Navigating a Strengthening Dollar Environment

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In a financial landscape marked by a strengthening U.S. dollar and shifting macroeconomic dynamics, active exchange-traded funds (ETFs) have emerged as strategic tools for investors seeking to capitalize on mid-cap equities. These funds combine the structural benefits of ETFs-such as liquidity and cost efficiency-with the flexibility of active management, offering unique advantages in volatile markets. This analysis explores how active ETFs can leverage mid-cap equity exposure during periods of dollar strength, supported by insights from recent market trends and fund performance.

Market Structure Advantages of Active ETFs in Mid-Cap Equities

Active ETFs provide distinct structural benefits in mid-cap equities, particularly during periods of U.S. dollar appreciation. Unlike passive ETFs, which follow rules-based indexing strategies, active ETFs enable real-time portfolio adjustments to mitigate risks associated with market concentration and currency fluctuations. For instance, during the 2020–2025 period, active ETFs demonstrated their ability to adapt to rapidly changing conditions, such as trade tensions and interest rate shifts, by dynamically reallocating assets to less volatile or undervalued mid-cap stocks.

A key advantage lies in liquidity provision. Mid-cap equities often face lower liquidity compared to large-cap counterparts, making them more susceptible to price swings during dollar rallies. Active ETFs, however, can act as liquidity providers in such scenarios. For example, during early 2025 trade tensions between the U.S. and Canada, active ETFs maintained trading volumes even as passive funds experienced outflows, underscoring their role in stabilizing volatile markets. Additionally, active ETFs employ derivative-based strategies, such as hedged equity approaches, to manage currency risk. These strategies are critical in mid-cap equities, where foreign exchange movements can disproportionately impact stock valuations.

Active vs. Passive ETFs: Flexibility in a Dollar Rally

The flexibility of active ETFs becomes particularly valuable during dollar rallies, where passive strategies may lag. Passive ETFs, such as WisdomTree's DGRW and USFR, offer low-cost exposure to broad markets but lack the agility to respond to macroeconomic shifts. In contrast, active ETFs like WisdomTree's ELD and WTMF allow managers to adjust sovereign and corporate debt allocations across emerging markets or deploy managed futures strategies to profit from both rising and falling markets according to WisdomTree. This adaptability is crucial in mid-cap equities, where market inefficiencies and rapid valuation changes are common during dollar-strengthening periods.

For example, the Timothy Plan US Large Cap Core ETF (TPLC), which tilts toward mid-cap stocks, employs fundamental and volatility-weighted strategies to outperform traditional cap-weighted benchmarks. While TPLC underperformed the S&P 500 ETF (SPY) during the 2020–2025 dollar rally, its approach highlights the challenges and opportunities inherent in active management. The fund's underperformance was attributed to its mid-cap focus, which faced headwinds as large-cap stocks outperformed amid rising interest rates. However, its strategy also demonstrated resilience in avoiding overexposure to illiquid or overvalued mid-cap names, a critical advantage in turbulent markets.

Performance Insights and Investor Considerations

Despite the structural benefits, active ETFs in mid-cap equities have shown mixed performance during dollar rallies. The Dimensional U.S. Targeted Value ETF (DFAT), while not strictly a mid-cap fund, illustrates this trend. DFAT's performance aligned with its benchmark during the 2020–2025 period, suggesting that even active strategies may struggle to outperform in environments dominated by macroeconomic forces like dollar strength. Similarly, the TPLC's underperformance underscores the importance of aligning active strategies with market conditions. Investors must weigh the potential for alpha generation against the risks of underperformance in sectors or regions disproportionately affected by currency movements.

Moreover, geopolitical factors, such as trade tensions, have amplified volatility in mid-cap ETFs. In early 2025, Canadian investors withdrew from U.S. mid-cap ETFs amid escalating trade disputes, reflecting how external shocks can impact fund flows and performance. Active ETFs that incorporate geopolitical risk assessments into their strategies may better navigate such challenges, offering a hedge against unpredictable macroeconomic events.

Strategic Implications for Investors

For investors seeking exposure to mid-cap equities in a strengthening dollar environment, active ETFs present a compelling case. Their ability to adjust portfolios in real time, manage liquidity, and deploy hedging strategies offers advantages over passive alternatives. However, success hinges on selecting funds with proven adaptability and risk management frameworks. The launch of products like the TD Q U.S. Small-Mid Cap Equity ETF (TQSM.U) in 2025 exemplifies how providers are innovating to address these challenges, combining quantitative strategies with active management to mitigate currency and geopolitical risks.

In conclusion, while active ETFs in mid-cap equities face headwinds during dollar rallies, their structural flexibility and strategic adaptability position them as valuable tools for investors aiming to navigate volatile markets. By leveraging active management's strengths, investors can potentially enhance risk-adjusted returns in an environment where traditional benchmarks may falter.