Active Mid-Cap ETFs: Can 'Growth with a Conscience' Outperform in a Volatile Market?

The past five years have tested the resilience of active management in mid-cap equities, as market volatility and shifting economic conditions have reshaped investor priorities. Amid this backdrop, the debate over whether active mid-cap ETFs can outperform passive benchmarks has intensified. While data from Envestnet | PMC's Q2 2025 ActivePassive Scorecard reveals that active mid-cap strategies underperformed their passive counterparts during the quarter, the broader narrative is more nuanced. Active ETFs in this space have increasingly emphasized valuation discipline and balanced approaches-often described as "growth with a conscience"-to navigate uncertainty. This article examines whether such strategies can deliver superior risk-adjusted returns in volatile markets, drawing on recent performance trends and structural advantages of active management.

The Mixed Record of Active Mid-Cap ETFs

From 2020 to 2025, active mid-cap ETFs have shown a mixed record against passive benchmarks. For instance, mid-cap growth managers lagged behind the Russell Mid Cap Growth TR USD benchmark, delivering -4.19% versus the benchmark's 14.01% in Q2 2025. Similarly, mid-cap value and core strategies underperformed, highlighting the challenges of navigating a market dominated by macroeconomic headwinds and sector-specific rotations. However, the broader ETF landscape tells a different story: active ETFs have captured 79% of total launches by 2024, driven by inefficiencies in small- and mid-cap markets. These inefficiencies, coupled with limited analyst coverage, create opportunities for active managers to identify undervalued companies and avoid overhyped names.

Valuation Discipline as a Strategic Edge

Active mid-cap ETFs have increasingly adopted valuation discipline to mitigate risks in volatile environments. A key approach is active value investing, which targets stocks trading at discounts to intrinsic value based on metrics like low P/E ratios, high dividend yields, and strong fundamentals. The Avantis U.S. Mid Cap Value ETF (AVMV), for example, employs this strategy by focusing on mid-sized firms undervalued by the market. AVMV's performance in 2025 underscores the potential of such strategies to deliver competitive returns during periods of market stress.

Defensive strategies further enhance resilience. Active ETFs leverage structural benefits like intraday liquidity and tax efficiency to adapt quickly to market shifts. Hedging with derivatives and diversifying holdings-particularly in sectors prone to concentration risks, such as technology-also help reduce downside exposure. These tactics align with the "growth with a conscience" ethos, balancing the pursuit of returns with risk management.

The Rise of Quality and ESG-Driven Strategies

In the context of "growth with a conscience," active mid-cap ETFs have increasingly integrated quality and ESG (environmental, social, and governance) factors into their valuation frameworks. The Invesco S&P MidCap Quality ETF (XMHQ), for instance, screens holdings based on return on equity (ROE) and financial leverage, creating a more defensive portfolio. Similarly, the Vanguard Mid-Cap Value ETF (VOE) prioritizes low P/E and P/B ratios, targeting undervalued companies with strong fundamentals. These strategies not only reduce downside risk but also align with investor demand for sustainable, long-term growth.

The Russell Midcap Growth Index, once a broad representation of mid-cap growth, has become increasingly concentrated, dominated by high-valuation names trading at 38x forward earnings. This concentration raises sustainability concerns, particularly in a market prone to rotations toward fundamentally driven stocks. In contrast, value-oriented ETFs like VOE and RFV (Invesco S&P MidCap 400 Pure Value ETF) have demonstrated resilience, with RFV posting an annualized return of 19.4% over five years as of 2025.

The Case for Active Management in a Fragmented Market

The deteriorating quality of small- and mid-cap indices further reinforces the case for active management. A significant portion of these indices includes non-earning companies, which have underperformed profitable firms by 1,151% since 1999. Active managers can selectively overweight or underweight such holdings based on profitability outlooks, a flexibility passive strategies lack. For example, AVMV's focus on mid-cap value stocks has allowed it to outperform traditional benchmarks by avoiding speculative names and emphasizing earnings quality.

Conclusion: Balancing Growth and Discipline

While active mid-cap ETFs have faced headwinds against passive benchmarks in recent quarters, their structural advantages and disciplined approaches position them to outperform in volatile markets. By integrating valuation discipline, defensive strategies, and ESG considerations, these funds address the limitations of concentrated growth indices and capitalize on market inefficiencies. As the Russell Midcap Growth Index becomes increasingly speculative, investors may find greater value in active strategies that prioritize quality, diversification, and long-term sustainability. In a world where volatility is the new normal, "growth with a conscience" may not just survive-it could thrive.