Small-cap equities benefited from a post-election rally, but have receded since. However, the headwinds that are stifling small-cap momentum may only be temporary, opening opportunities to obtain small-cap exposure now before an eventual rally.
As Investopedia mentions, small-caps are waiting for a trigger event to jump-start prices again. Right now, high interest rates and tariffs continue to weigh on small-caps just like the rest of the market.
“Overall, sentiment has been cautiously optimistic, but many worry about lack of a catalyst … to spur small cap outperformance amidst rate/policy uncertainty and elevated valuations,” wrote Bank of America analysts, noting that flat YoY earnings could keep investor confidence in a lukewarm state.
There are some potential tailwinds that could eventually boost small-caps. Under President Trump, a deregulated environment could be beneficial for small-cap stocks. Additionally, if the Federal Reserve continues its initial path to rate cuts, the lower debt service costs will be a boon to small-caps, which typically operate with financing.
An Active Mid- and Small-Cap Option
Investors have a plethora of options to add small-cap equity exposure. The advent of ETFs has certainly allowed for broad-based exposure. But to further narrow the field, the current market environment warrants looking at active funds; in particular, the Neuberger Berman Small-Mid Cap ETF (NBSM ).
Active ETFs like NBSM use the expertise of portfolio managers who can adjust the holdings as necessary given the current market environment. With plenty of market uncertainty occurring now, the active component removes the guesswork in selecting the ideal small-cap holdings.
Regarding NBSM, the managers use a bottom-up analysis to identify firms that exhibit high value. Factors like like barriers to entry, historical returns, and established business operations are taken into account when looking at the vast universe of small-cap stocks.
As its fund name explicitly says, NBSM balances the small-cap exposure with midcap exposure. Midcap equities strike a balance between small-cap growth and large-cap stability, giving NBSM additional market-cap diversification. Adding midcap equities can also help smooth out market volatility as opposed to sole exposure to small-caps.
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