Smaller stocks and related ETFs have found a groove since last month’s presidential election. But performances across that vast landscape haven’t been uniform. Investors have been rewarded for selectivity. For example, the Russell 2000 Index is up 0.72% for the month ending Dec. 6. But the VanEck Morningstar SMID Moat ETF (SMOT) is beating the small-cap benchmark by more than 100 basis points during that span.
The $395 million SMOT debuted in October 2022. It’s the small/midcap member of VanEck’s extensive wide moat ETF suite. SMOT follows the Morningstar US Small-Mid Cap Moat Focus Index. SMOT could build on its impressive 17.52% YTD gain in 2025. That’s because market participants are turning toward asset classes correlated to the domestic economy.
American Exceptionalism Could Propel Moat ETF SMOT
One of the primary catalysts behind the post-election rally by smaller stocks is the expectation that the Trump administration will make “American exceptionalism” a policy issue. That domestic focus is likely to benefit smaller stocks.
“Small- and mid-cap companies are much more likely to have customer bases that are either exclusively or predominantly in the United States,” noted Bob Kaynor, head of small and midcap equities at Schroders. “For that reason, small- and mid-cap stocks can provide investors with more direct exposure to the US economy. Given how expensive large caps are today, small- and mid-cap stocks also provide a less costly way to gain that exposure.”
Another catalyst for smaller stocks could be the oft-documented inexpensive valuations found on the asset class. That’s something SMOT leans into. That’s because its index attempts to identify smaller wide moat names trading at attractive multiples. Also, rebounding consolidation and IPO activity could be sparks for smaller stocks next year.
Inflation Factoring In
“The pickup in M&A activity and IPOs benefits small-cap stocks in multiple ways. Attractive small caps often become acquisition targets, and high-quality companies garnering headlines as they go public increases interest in the small-cap space,” added Kaynor. “Overall, the pick-up in animal spirits demonstrated by greater M&A activity and IPOs delivers the optimism that increases risk appetites and the confidence investors may need to pursue the potentially stronger growth small caps can deliver.”
The Schroders strategist also noted that inflation, which was a drag on smaller stocks just two years ago, has returned to a range historically conducive to gains for this corner of the equity market.
“While small caps have historically outperformed their large-cap brethren in periods when annual inflation has exceeded 1%, the higher interest rates that come when central banks try to reduce high inflation can be challenging for small companies. Much of their debt gets financed with shorter-term and floating-rate instruments. As a result, financing became much more expensive for the small caps when the Fed began hiking rates in early 2022,” concluded Kaynor.
For more news, information, and analysis, visit the Beyond Basic Beta Channel.