It’s proven that the fastest growing, most dynamic companies should be the small and mid-sized ones. Confirmed by academic research, this ‘small cap effect’ means that small and mid-capitalisation (SMID) stocks outperform large ones over time.1 The VanEck Morningstar US SMID Moat UCITS ETF is an easy way to invest in their growth.
1 The Fama-French Three-Factor Model identifies the small-cap effect.
Main Risk Factors: Equity market risk, risk of investing in smaller companies. Please refer to the KID and the Prospectus for other important information before investing.
The VanEck Small Cap ETF is unique in Europe with its focus on US high-quality smaller companies. Over time, SMID stocks have outperformed (see chart below)2. Yet this small cap ETF also seeks to focus on quality, selecting companies with long-term competitive advantages according to Morningstar. The large and diverse US equity market is considered a rich hunting ground for finding overlooked high-quality stocks at relatively inexpensive valuations.
2 Past performance is not guarantee of future results.
Percent of Time Small and SMID Caps Outperform Large Caps | January 2000 - March 2024
Source: Morningstar.
Small and mid-cap stocks have historically delivered higher returns than large caps over time. Our recent analysis shows that the longer the investment period, the more likely it is that smaller companies outperform. They have been less likely to outperform over shorter periods. Please remember that the situation on financial markets can change rapidly and the past performance is not an indicator of future results.
SMID Cap Forward P/E Relative to Large Cap Forward P/E | January 2004 - March 2024
Source: Morningstar.
Small and mid-cap valuations are near 20-year lows relative to large caps, according to the price-earnings-ratio based on 2024 earnings forecasts (forward P/E). Declining interest rates are often the catalyst for a revaluation of these stocks as they are particularly sensitive to rates of economic growth.
SMID vs Large Cap Stock Market Share and Assets Under Management | As of 31/03/2024
Source: Morningstar.
The Small Cap ETF takes advantage of the fact that SMID stocks are overlooked. While they account for about a quarter of the US equity market’s value, professional asset managers only allocate approaching a fifth of portfolios to them. When combined with the fact that relatively few stock analysts cover them, they are likely to be inefficiently priced.
Source: Morningstar.
It was Warren Buffett, the celebrated investor, who coined the term “moat” in a 1999 Fortune magazine article, arguing that the key to investing was assessing a company’s competitive advantage and its likely endurance. The Small Cap ETF tracks an index provided by Morningstar, the research firm, which assesses five economic moats to judge quality.
Source: Morningstar.
Investing at a fair value is just as important as buying quality stocks. Morningstar’s equity research assesses the fair value of stocks using a discounted cash flow model. If a stock trades above or below the fair value estimate, this may create opportunities to sell or buy respectively.
When building ETFs, we’re committed to introducing innovative strategies. In summary, the small cap ETF offers the following features:
The prices of the securities in the Fund are subject to the risks associated with investing in the securities market, including general economic conditions and sudden and unpredictable drops in value. An investment in the Fund may lose money.
The securities of smaller companies may be more volatile and less liquid than the securities of large companies. Smaller companies, when compared with larger companies, may have a shorter history of operations, fewer financial resources, less competitive strength, may have a less diversified product line, may be more susceptible to market pressure and may have a smaller market for their securities.
