Smaller Stocks May Be Ready for Bigger Things
News Summary
Despite Federal Reserve interest rate cuts, the Russell 2000 Index has only seen modest gains, indicating that patience is required for significant returns in smaller stocks. The Neuberger Berman Small-Mid Cap ETF (NBSM) offers a potential solution. NBSM is a small/midcap (SMID) blend fund, meaning it isn't solely reliant on either segment for returns. The inclusion of midcaps can offer lower volatility and potentially superior return profiles compared to pure small-cap counterparts. The fund's actively managed status is a compelling trait in the SMID-cap universe, where a relative lack of analyst coverage can lead to mispriced opportunities. While roughly half the companies in the Russell 2000 are unprofitable and highly leveraged, NBSM's emphasis on quality helps it avoid indebted, rate-sensitive companies. NBSM is notably underweight the healthcare sector and significantly overweight industrial stocks, suggesting a positive correlation with rising defense and infrastructure spending. Wall Street analysts anticipate the small-cap index could rise as much as 20% in the next 12 months, outperforming the S&P 500's projected 11%, driven by rate cut expectations.
Background
The Federal Reserve has implemented interest rate cuts in 2025, a development typically considered beneficial for smaller stocks, as these companies often rely more on variable rate financing and lower borrowing costs ease their interest expenses. However, the Russell 2000 Index has shown only modest gains since the rate cuts, indicating a complex market reaction to small-cap equities. The small and mid-cap market segments generally suffer from a lack of analyst coverage, which creates opportunities for active fund managers to identify undervalued or mispriced companies through diligent research. Concurrently, approximately half of the companies within the Russell 2000 Index are unprofitable and highly leveraged, making them particularly sensitive to interest rate fluctuations and the broader economic health.
In-Depth AI Insights
Why are small-cap stocks showing only modest gains despite Fed rate cuts, and what deeper market dynamics does this reveal? - Rate cuts largely priced in: The Federal Reserve's rate cuts may have been significantly anticipated and priced into the market, leading to a