Lower interest rates may set the stage for the outperformance of SMIDcap ETFs.
The Federal Reserve cut interest rates on Wednesday, reducing the target range for the federal funds rate by one half percentage point. Importantly, this marked the first rate cut since March 2020. Another half point in rate cuts is expected to follow at some point later this year.
Small- and midcap equities have historically had strong returns during this period. SMIDcaps have outperformed large caps in the first three, six, and 12 months after an initial interest rate cut.
The beginning of a Fed rate cutting cycle paves the way for lower borrowing costs, easing a key headwind for SMIDcaps. Small- and midcap companies are more leveraged to the health of the economy and interest rates than large-cap peers. These smaller companies also tend to be less profitable and carry more debt as they depend on the capital markets to fund growth.
Therefore, as lower interest rates effectively reduce financing costs, SMIDcaps should experience relief from challenges faced in recent years.
Why SMIDcap ETFs Look Compelling
Small- and midcap companies are often underrepresented in portfolios. As SMIDcaps are positioned to potentially outperform in the near future, the Neuberger Berman Small-Mid Cap ETF (NBSM ) may be worth consideration.
NBSM is actively managed, which may add value in the SMIDcap space. The investment team seeks to identify companies that are mispriced due to a lack of analyst research coverage and the market’s focus on short-term time horizons.
The SMIDcap ETF charges 74 basis points and has $196 million in assets under management.
There are many reasons SMIDcap stocks look attractive. For one, SMIDcaps may offer high growth potential with less volatility than small-caps. This effectively combines some of the best attributes of small- and large-cap stocks.
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