Balancing Fees and Performance: A Look at MMSC's Expense Ratio and Benchmark Results

The First Trust Multi-Manager Small Cap Opportunities ETF (MMSC) positions itself as a vehicle for investors seeking exposure to small-cap growth equities. However, its expense ratio of 0.95%—a figure notably higher than many peers—raises questions about whether its performance justifies the cost. This analysis examines MMSC's expense structure, its comparative results against benchmarks, and what investors should consider before allocating capital to this fund.

The Expense Ratio Conundrum

MMSC's expense ratio of 0.95% places it at the higher end of the small-cap ETF spectrum. For context, the average expense ratio for U.S. equity ETFs was approximately 0.40% in 2025, according to industry data. While active management often commands higher fees, MMSC's cost is also elevated compared to passive peers tracking similar indices, such as the iShares Russell 2000 Growth ETF (IWO), which carries a 0.20% expense ratio.

Critics argue that such fees require consistent outperformance to justify. Yet MMSC's recent results have been mixed. Over one year, it delivered a 6.73% return—underperforming both its ETF Database Category average (9.00%) and the broader market's S&P 500 Total Return Index (^SPXTR), which rose 9.5%.

Performance: A Tale of Time Horizons

MMSC's performance reveals a clear split across different time frames. Over three years, the fund's annualized return of 12.53% outpaced its category and segment averages, suggesting skill in navigating small-cap growth cycles. However, shorter-term results tell a different story: its year-to-date (YTD) return of -0.99% lags behind the category average (-0.21%) and the S&P 500's 6.20%.

This inconsistency raises questions about the fund's ability to adapt to shifting market conditions. The S&P 500's stronger YTD performance highlights how broader market dominance can overshadow smaller-cap strategies, especially in volatile environments.

Risk Metrics: Lower Volatility, Concentrated Exposure

While MMSC's beta of 0.96 and standard deviation of 1.36% suggest it's less volatile than the market, its portfolio concentration is a concern. The fund holds 197 securities, but the top 10 represent just 15.33% of assets. This moderate diversification contrasts with peers that often spread risk more thinly. However, the fund's 99.67% stock allocation leaves little room for defensive moves during downturns.

The low expense ratio of many passive competitors further complicates the case for MMSC. Investors must weigh whether its active management—guided by multiple sub-advisors—delivers enough alpha to offset the cost.

Is MMSC Worth the Fees?

The fund's 3-year outperformance suggests potential value for long-term investors willing to tolerate short-term volatility. Its focus on small-cap growth stocks aligns with historical trends where active managers have occasionally excelled in identifying undervalued opportunities. However, the 0.95% fee becomes harder to justify during periods like 2025, when broader indices outpace it.

Investors should also consider liquidity: MMSC's average daily volume of ~5,870 shares is modest, which could lead to wider bid-ask spreads. For large allocations, this friction might offset any performance gains.

Final Analysis: Proceed with Caution

MMSC isn't a slam dunk, but it's not a write-off either. Its expense ratio demands consistent outperformance, which it has achieved over three years but not in shorter intervals. The fund's risk profile—low volatility but concentrated holdings—may appeal to investors seeking growth with some downside protection. However, passive alternatives like IWO offer lower costs and broader diversification.

For those bullish on small-cap growth and willing to pay for active management, MMSC could be a tactical addition to a diversified portfolio. But in a market favoring large-cap stability, investors should remain patient and monitor its performance against benchmarks closely. As always, fees matter—especially when the market's best performers are charging a fraction of MMSC's cost.

In conclusion, MMSC's value hinges on investors' time horizon and tolerance for active management's inherent unpredictability. Proceed with an understanding of its trade-offs, and consider pairing it with lower-cost options to balance cost and diversification needs.