Higher-for-longer interest rates and ongoing market uncertainty have made SMID cap investing more difficult—and more interesting. The potential upside for this asset class is hard to ignore, and in this environment, an active approach like that offered by Baron SMID Cap ETF (BCSM) is more relevant than ever.
BCSM is managed by veteran stock pickers Laird Bieger and Randy Gwirtzman, who seek under-researched companies with strong fundamentals that are early in their growth trajectories.
“By identifying these businesses early, we can invest at the beginning of their growth phase and often at valuations that are discounted relative to larger-cap companies with comparable growth prospects,” they noted, discussing the first full quarter of results for BCSM.
The AI Narrative Disconnect
BCSM’s distinct investment approach has become increasingly important in a market fixated on artificial intelligence (AI). In their Q1 recap, Bieger and Gwirtzman highlighted a sharp divergence between perceived AI winners and losers—one that created a significant valuation disconnect, regardless of underlying business performance and fundamentals.
“For bottom-up investors like us, it was a challenging environment—one where strong business results were simply not being rewarded by the market,” the managers noted. “Several of our holdings beat their earnings estimates and raised their 2026 guidance, yet saw their stocks decline more than 30% in the period, simply because they were categorized as AI losers.”
For disciplined, long-term investors, this kind of mispricing presents opportunities. Rather than reacting to short-term market noise, Baron Capital leans into temporary market dislocations and focuses on investing in fundamentally strong companies whose valuations have been discounted by sentiment. This leads to a curated portfolio of high-quality growth businesses positioned to capture significant upside when sentiment shifts and the market returns to rewarding fundamentals.
“When the market ‘throws the baby out with the bathwater’ we are poised to make investments that historically have produced some of our highest returns,” they added.
The Q2 Active Playbook
Halfway through Q2, the ETF has continued to execute on this thesis. BCSM has been adding to deeply discounted software companies trading at historically low multiples, while reinforcing high-conviction core positions in names like Samsara Inc., Guidewire Software, Inc., and Dynatrace, Inc—businesses the team believes are fundamentally strong despite being temporarily out of favor.
“The AI winner versus AI loser dynamic that drove so much of the market behavior this quarter will not last forever, and when the market returns to rewarding fundamental performance, we believe our portfolio is well positioned to benefit,” Bieger and Gwirtzman said.
BCSM’s disciplined, intrinsic-value approach offers investors high-conviction exposure to a segment of the market where active management has a significant edge—and where the setup for the second half of 2026 is looking increasingly compelling.
To learn more about the active ETFs offered by Baron Capital, click here.
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