SPY may be the landmark ETF many investors know about, but it isn’t the be-all, end-all in the space. Plenty of ETFs can complement the strategy, offering a different view away from the mega-cap-heavy S&P 500. In this case, a SMID cap ETF may appeal especially as rate cuts are looming. A strategy like the T. Rowe Price Small-Mid Cap ETF (TMSL), could stand out in that case, having recently outperformed both the broad market SPY ETF and its SMID benchmark, the Russell 2500 Index.
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According to YCharts, the SPDR S&P 500 ETF Trust (SPY ) returned 4.4% over the last month. Meanwhile, the SMID cap ETF TMSL returned 7.66% in that time. What is TMSL doing that helps it produce that performance, and what role could it play for investors?
A Very Competitive SMID
TMSL is actively managed but only charges 55 basis points (bps)—which is very competitive among active small/mid-cap managers. The active SMID cap ETF launched just over a year ago but has already seen its AUM rise above $100 million. TMSL looks at a diverse group of small- and mid-cap names with either growth or value characteristics. Through fundamental analysis, the portfolio team assesses firms based on relative valuations, stability, earnings quality, and more.
Looking forward, rate cuts could boost those smaller firms. Many smaller firms take out significant loans to get started with the aim of future revenues. Tech and biotech firms particularly fall into that category. Rate cuts could help firms in the space deal with the cost of maintaining that debt.
What’s more, concentration risk looms for the big names that lead in an ETF like SPY. TMSL’s ability to lean on active investing can help it avoid some of the worst aspects of concentration risk while relying on T. Rowe Price’s research capabilities. For those investors looking for a strategy to complement and diversify some of the S&P 500 concentrated mega-cap exposure, the SMID cap ETF TMSL may appeal.
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