Investors may be surprised to learn how little small-cap exposure is needed to provide meaningful diversification to a portfolio concentrated in large-cap growth.
The S&P 500 is 20 times larger than the Russell 2500. This means that just 1% reallocation to small-caps from large-caps could be a 20% increase for small-caps, according to Neuberger Berman.
In short, it doesn’t take much small-cap exposure to have a meaningful impact. Furthermore, with the new administration expected to be a tailwind for small-caps, now may be an ideal time to add exposure to the Neuberger Berman Small-Mid Cap ETF (NBSM ).
Small- and midcap companies are more leveraged to the health of the economy and interest rates than large-cap stocks. Smaller companies also tend to be less profitable and carry more debt, as they depend on the capital markets to fund growth. Therefore, NBSM could be well positioned as the Fed continues to cut rates.
Active Management May Add Value When Diversifying From Large-Cap Growth Indexes
NBSM is actively managed, which may add value in the SMIDcap space. The investment team looks for undervalued firms with strong positions, using bottom-up analysis to identify firms believed to be valued below their intrinsic worth. Its active managers do so by looking at factors like barriers to entry, historical returns, and established business operations.
An active manager for a fund like NBSM could potentially find those best positioned to benefit from lower rates. This is something outside of the purview of passive funds offering exposure to the space.
Furthermore, NBSM also seeks to mitigate the elevated volatility inherent to small- and midcap investing while reducing downside risk.
NBSM has $214 million in assets under management. The fund has a 74 basis point expense ratio.
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