2024 offered significant returns for investors, with the S&P 500 up 23.5% over the last year per YCharts data. Figuring out the right approach to 2025, then, looms as a key task for investors. ETFs may not be able to replicate the year’s returns with a simple passive S&P 500 approach. Instead, it may be worth looking at the potential of standout small-caps in the new year. For a few important reasons, they could provide a meaningful boost to portfolios that merit a closer look.
See more: Look to Sector ETFs to Rebalance Ahead of 2025
Small-caps look set to benefit significantly from rate cuts that have piled up over the last few months. For those who have yet to add small-cap exposure, the opportunity for upside does remain, given how much time it takes for rate cuts’ boost to work through the system. By easing borrowing costs, small-cap firms can look to take a step forward themselves. At the same time, given how much small-caps benefit from M&A activity, which itself requires borrowing, cheaper debt costs could benefit small-caps in that way, too.
Adding small-cap exposure, then, could benefit portfolios to start the new year while also adding diversification. Many investors currently face concentration risk from holding too many large caps, especially in tech. Small-caps can provide an important degree of diversification away from those risks.
Amid this small-cap moment, identifying the “best” small-cap opportunities is the name of the game. The Fidelity Enhanced Small Cap ETF (FESM ) charges a 28 basis point fee. Having converted from a mutual fund just over a year ago, the fund has already surpassed $1 billion in AUM, per ETF Database data. The active small-cap ETF’s 1-year return rate was 16.22% as of 12/31/24, per Fidelity Investments data.
FESM’s active approach, based on quantitative analysis that evaluates growth, profitability, historical valuation, and other factors, could help it find the strongest small-cap candidates in the new year. For those looking for new equity options in ETFs, FESM could offer a compelling strategy to consider.
For more news, information, and analysis, visit the ETF Investing Channel.
Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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