While US “SMID,” or small-mid cap, stocks have underperformed large-cap stocks in recent years, there are reasons for investors to consider this asset class in the current market environment, according to insights from Morningstar and Van Eck.
In a recent webinar, the team highlighted the Morningstar US Small-Mid Cap Moat Focus Index, which identifies US SMID-cap companies with economic moats and attractive valuations, encouraging investors to take a closer look at the US SMID-cap space.
• Reason #1 - Relative Valuations. The Morningstar US Small-Mid Cap Moat Focus Index reflects much better valuations for US SMID-caps versus their large-cap counterparts, as reflected by the Morningstar US Large Cap Index.
• Reason #2 – Market Cycle. US SMID-cap stocks have tended to perform well in periods of declining interest rates, economic growth and stabilizing inflation, all market characteristics we are currently seeing in the US.
• Reason #3 – Index Methodology. The Morningstar US Small-Mid Cap Moat Focus Index draws on a methodology that is shaped by the forward-looking insights of Morningstar’s equity research team. It incorporates the Morningstar Economic Moat Rating and Morningstar Fair Value Estimates to screen for companies with durable competitive advantages that are also trading at attractive valuations, which could provide a measure of protection in an uncertain macro market environment.
Morningstar US Small-Mid Cap Moat Focus Index: Price-to-Fair Value Estimate
Brandon Rakszawski – Director of Product Management, Van Eck ETFs:
“We’ve seen a lot of our clients allocate assets toward US small- and mid-cap stocks in recent years with the way market dynamics have played out. SMID caps can be a good diversification option for investors. When looking at small and mid-cap stocks, however, it is very important to draw on strong research given this area can be less efficient and less closely covered.”
Andrew Lane – Director of Equity Research, Index Strategies, Morningstar:
“Amid turbulent market conditions driven by rapidly shifting US government policy and heightened geopolitical instability, the Morningstar US Small-Mid Cap Moat Focus Index’s inclusion of companies with sustainable competitive advantages, what we refer to as ‘economic moats,’ may prove highly valuable. Indeed, companies with economic moats and, in turn, pricing power are better able to pass tariff-related cost inflation to customers and also typically provide downside protection versus the broader US SMID-cap space.”
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