Small- and midcap ETFs are often touted for their potential, with the former in particular providing a lot of upside. In recent years, the huge AI hyperscalers have produced outsized returns and majorly overshadowed smaller firms in overall stock market performance. However, so far this year, it’s SMIDcaps that are winning. While the S&P 500 is down 0.7% YTD, the SMIDcap ETF TMSL is up 8% YTD, thanks to its active approach.
Key Takeaways
- The active SMIDcap ETF TMSL is outperforming both its category and the broader market.
- Its active approach, as well as strong fundamentals for its securities, may be helping.
- Smaller firms can also outperform in recovery periods after economic downturns.
SMIDcaps Having a Moment in TMSL
The T. Rowe Price Small-Mid Cap ETF (TMSL ) charges a 55 basis point fee to actively invest in small- and midcap stocks, or “SMIDcaps.” As mentioned, the fund has returned 8.1% YTD, according to YCharts. That compares positively to the broader S&P 500, which is down, and to the MSCI USA SMID Cap Index, which is only up 3.9% YTD.
See more: Analysis: Active ETFs Lapped Passive ETF Inflows in March
What has the fund done to outperform both SMIDcaps and the broader S&P 500 so thoroughly? The strategy’s active approach, leaning on T. Rowe Price’s fundamental research capabilities, may explain its performance. Its managers engage in bottom-up portfolio construction, assessing each security based on fundamentals, rather than just putting together a list of market cap-weighted holdings.
TMSL selects stocks based on metrics like profitability, earnings quality, returns on equity, and more. Its advisers also scrutinize cash flow, sales, and book value. Notably, it is also just a few months away from hitting the important three-year ETF milestone, potentially opening it up to a spike in inflows once the fund has its three-year track record.
What outlook may it have, then, and can it continue to outperform? That active flexibility and continued focus on each stock as it is can help TMSL adapt if the economy takes a downturn. As for SMIDcaps on their own, the picture is somewhat murkier.
They may benefit from continued desire for diversification away from megacap tech, but how might they do if there’s an energy-cost driven recession? Investors may not want to time the market. However, research does show that once a downturn ends, smaller firms tend to do well in the recovery. Together, those factors and TMSL’s performance may speak to its continued appeal right now, outperforming multiple metrics
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