SMIDcaps outperformed large-cap growth equities during the third quarter.
Investors rotated into industries with more interest-rate risk during the third quarter in anticipation of rate cuts from the Fed. SMIDcaps are more sensitive to interest rates and economic conditions than large-caps, as smaller companies often need to rely more on bank financing to fund growth and operations.
The Federal Reserve cut interest rates in September, reducing the target range for the federal funds rate by 50 basis points. Furthermore, another 50 basis points in rate cuts is expected at some point later this year. SMIDcaps have historically outperformed large-caps in the first three, six, and 12 months after an initial interest rate cut.
There are several reasons SMIDcap stocks look attractive in the current environment. At a glance, SMIDcaps may offer high growth potential with less volatility than small-caps.
The Neuberger Berman Small-Mid Cap ETF (NBSM) may be a compelling fund for investors looking to capitalize on SMIDcaps’ recent outperformance. NBSM climbed 8.2% during the third quarter, bringing year-to-date returns to 4.7% as of Sept. 30.
Active Management May Be Helpful in SMIDcaps
NBSM is actively managed, which may add value in the SMIDcap space. The investment team looks for undervalued firms with strong positions, using bottom-up analysis to identify firms believed to be valued below their intrinsic worth. Its active managers do so by looking at factors like barriers to entry, historical returns, and established business operations.
An active manager for a fund like NBSM could potentially find those best positioned to benefit from lower rates. Importantly, this is something outside of the purview of passive funds.
NBSM has $198 million in assets under management. The fund charges 74 basis points, putting it within the normal fee range for active funds.
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