Large-caps have played a key role in the S&P 500 and investors’ portfolios this year, perhaps even more so than in most years. However, with large-cap tech, especially driving performance, concentration risk lingers. That has led investors to consider smaller firms, especially as rate cuts could boost their prospects. The question has been, which segment will step up in the new year: midcap or small-cap firms? The active ETF TMSL offers a compelling answer by investing in both.
See more: Combine Large Cap & Disruptive Tech Stocks in Active ETF TTEQ
TMSL, the T. Rowe Price Small-Mid Cap ETF, charges just 55 basis points to invest in mid- and small-caps. The strategy, which launched just last year, has accumulated more than $350 million in AUM since then. The fund actively invests in small- and mid-cap firms in a blended approach that spans both growth and value styles.
Applying bottom-up stock selection, the fund assesses individual firms based on factors including — but not limited to — profitability, stability, earnings quality, and projected growth rates. Its managers also scrutinize firms for factors like book value, sales, and cash flow. Together, that helps the strategy craft its overall allocation, leaning on T. Rowe Price’s fundamental research capabilities.
With that approach to mid- and small-caps, the active ETF has returned 31.8% over the last year, per T. Rowe Price data. That has significantly outperformed the fund’s benchmark, the Russell 2500 Index, by 5.35% in that time.
Why might such an active ETF stand out in the new year, then, compared to other mid- and small-cap-focused funds? With rate cuts potentially boosting smaller firms’ ability to borrow and grow, adding exposure there makes sense. An active ETF like TMSL, specifically, can adapt more quickly than passive peers in the space. Such a fund can make for a solid satellite option, then, not only for those looking specifically at this equity category but for those looking for overall equity upside.
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