NBSM ETF

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.

Advisors and investors looking to capture potential tailwinds for small-cap stocks headed into 2025 would do well to consider active management. Given the disparities between top- and bottom-performing small-caps, strategies that target high-quality small-caps could prove beneficial.

The valuation gap between large-cap stocks and small-cap stocks alongside growing small-cap tailwinds leave the asset class favorably positioned looking ahead. Investors seeking to reallocate to small-caps to capture potential outsized returns would do well to consider the Neuberger Berman Small-Mid Cap ETF (NBSM).

NBSM is a relatively new active small/mid-cap blend fund with a 0.74% expense ratio and $199 million in assets under management. I don't always mind high-fee funds with this size segment, and I appreciate the advisor's quality screens, which were made apparent after evaluating NBSM's numerous quality features. NBSM's 1.04 five-year beta is also one of the lowest in its category, but its 25.52x forward P/E is difficult to justify for the mediocre sales and earnings growth offered.

SMIDcaps outperformed large-cap growth equities during the third quarter.  Investors rotated into industries with more interest-rate risk during the third quarter in anticipation of rate cuts from the Fed.

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.