Broader gauges of smaller stocks, both mid- and small-caps, are lagging the S&P 500 on a YTD basis. But those indexes have also delivered double-digit returns. That confirms there’s opportunity to be had with equities outside the realm of the biggest names. Further supporting the case for smaller stocks is some favorable history. Mid- and small-cap equities have historically performed well against the backdrop of declining interest rates. With the Federal Reserve having lowered rates in September and with expectations of more to come, ETFs like the VanEck Morningstar SMID Moat ETF (SMOT ) could be ready for closer examination.
With its emphasis on wide moat stocks, the $396.65 million SMOT offers investors a level of selectivity not found with basic smaller stock index strategies. Additionally, the VanEck ETF has proven its correlation to declining interest rates as highlighted by a 3% gain over the past month. More could be in store for this wide moat fund.
Wide Moat ETF SMOT Could Be Ready to Shine
As the old saying goes, market history doesn’t always repeat, but it often rhymes. That’s worth remembering when examining the medium-term outlook for SMOT.
“Looking at previous periods of monetary easing, rate cuts have had a positive impact on small and mid-cap companies,” according to VanEck research. “These smaller firms typically carry more debt than larger corporations, making them more sensitive to rising interest rates. As long as the economy remains stable and avoids a recession, historical trends show that rate cuts generally provide stronger support for smaller-cap stocks compared to their large-cap counterparts.”
Another historical trend could support the case for SMOT. Dating back to 2008, small-cap stocks have performed well in the months and the full year following mid-term and presidential elections regardless of the outcomes. With Election Day arriving on Nov. 5, SMOT could be a valid near-term consideration for investors seeking exposure to smaller stocks.
That case is enhanced by the fact that mid- and small-cap stocks remain attractively valued relative to their large-cap counterparts, meaning investors don’t need to pay up to access SMOT’s perks.
“Small and mid-cap stocks are trading at a significant discount compared to their large-cap counterparts, presenting an attractive entry point for investors,” added VanEck. “Historically, valuation gaps between large and smaller companies tend to close over time, potentially paving the way for outsized gains as the market corrects this disparity and valuations revert to the mean.”
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