Small- and mid-cap (SMID cap) ETFs have seen strong flows recently, making it important that investors fully understand why moving down the cap spectrum can make sense in a falling rate environment.
In short, small-and mid-cap stocks, or SMID caps, are more sensitive to interest rates and economic conditions than larger companies. This is because smaller companies tend to rely more on borrowing from capital markets to fund growth. In a rising or high-rate environment, borrowing costs may impact growth potential.
Conversely, due to their sensitivity to interest rates, SMID caps have historically benefitted earlier than large caps in a declining rate environment.
As the Federal Reserve cut interest rates in September, and the market expects they may cut again in December, many investors are looking to capitalize on the investment opportunity. Importantly, SMID caps have historically outperformed large caps in the first three, six, and 12 months after an initial interest rate cut.
Beyond interest rate sensitivity, SMID caps look attractive as they may offer high growth potential with less volatility than small-caps.
SMID Cap ETFs Worth Consideration
Two funds worth consideration in a falling-rate environment include the Fidelity Fundamental Small-Mid Cap ETF (FFSM ) and the Fidelity Small-Mid Multifactor ETF (FSMD ).
FFSM is actively managed and seeks long-term capital growth. The fund invests primarily in stocks within small- and mid-cap segments, similar to those within the Russell 2500 Index. The fund invests in growth, value, or both when investing.
The fundamental SMID cap ETF uses fundamental factors as well as quantitative analysis to assess the industry position and financial health of individual companies. It also considers market and economic conditions. FFSM has an expense ratio of 0.43%.
On the other hand, FSMD provides exposure to U.S. small- and mid-cap companies that score highly on four factors: quality, value, momentum, and low volatility.
The fund seeks to track the Fidelity Small-Mid Multifactor Index. FSMD’s underlying index selects stocks from the top 3,000 U.S. companies (excluding the top 500) based on float-adjusted market capitalization.
Eligible securities in FSMD’s underlying index demonstrate high-quality, attractive valuations, lower volatility, and positive momentum signals compared to the broad market. Notably, the sector weights adjust to neutral at each index rebalance. FSMD has an expense ratio of 0.15%.
For more news, information, and analysis, visit the ETF Investing Channel.
Fidelity Investments® is an independent company, unaffiliated with VettaFi. There is no form of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the information herein. VettaFi LLC is the author and owner of these articles.
