If 2024 was the year of mega-cap tech, 2025 could potentially be the year of small- and midcap firms. Just a handful of big firms drove a significant percentage of returns last year, which many investors rode to a successful 2024 overall. However, relying on that set of large-cap firms poses a notable degree of concentration risk. What’s more, with valuations high, those big firms may not produce the same performance in 2025 as in 2024. The right small- and midcap ETF, then, could offer both diversification and potential upside outside of those mega-cap names.
See more: Why SMIDcap ETFs Make Sense in a Falling-Rate Environment
Small- and midcap firms could benefit from the market widening in 2025. Rate cuts continue to filter through the U.S. economy, with their lagging impact still making its way to smaller firms. Those firms, for example, could benefit from increased M&A activity thanks to cheaper borrowing costs. Both small- and midcap companies, especially in tech, borrow heavily to fund their growth. Cheaper borrowing costs could help those firms.
Leaning into those firms could also help diversify a portfolio’s equity sleeve. With the overall S&P 500 relying on just a handful of firms, adding smaller firms could mitigate a potential fall for those larger names.
The Fidelity Fundamental Small-Mid Cap ETF (FFSM ) could offer one option therein. The ETF actively invests in global small- and midcap firms. It seeks firms that meet growth and value standards, applying fundamental and quantitative analysis. Additionally, the strategy considers an issuer’s financial health and industry position.
Together, these factors have helped the active small- and midcap ETF return 14.6% over the last year, according to Fidelity Investments data. With an active approach backed by the firm’s research capabilities and a charge of 43 basis points, FFSM could offer a compelling route into the space.
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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