The market dominance of mega caps is facing a critical test. Large cap companies, typically those found in the “Magnificent Seven,” have been propelling the market for the last few years. However, there could be a proverbial changing of the guard. As investors seek better-aligned value, small- and mid- caps could present compelling opportunities. One fund is poised to capture that potential upside: Baron SMID Cap ETF (BCSM).

In the current landscape, shifting interest rates and demand for tangible earnings growth are among the factors driving markets. Again, household large cap names have been providing the majority of gains recently. Still, the spotlight could now be shifting to small- and mid-cap (SMID) companies.

Here are three reasons why a fund like BCSM is essential in today’s market:

1. Active Agility

SMID-cap stocks can be more volatile than large-caps, requiring experienced managers and active risk mitigation. BCSM is managed by Laird Bieger and Randolph Gwirtzman. They use an active mandate to construct the fund’s portfolio, drawing on their 28 years of investing experience, each. The fund draws from small and mid-cap companies found in the Russell 2500 Growth Index. This has resulted in a concentrated portfolio of high-conviction holdings.

Using rigorous research and a bottom-up stock selection methodology, BCSM focuses on scalable businesses with defensible moats. As small cap companies evolve and grow into mid-cap operations, the fund remains invested in these names to capture future upside compared to passive small cap indexes that could be forced to remove these names during rebalancing. Again, this speaks towards the active benefits compared to indexed funds.

“As companies progress from small- to mid-cap in line with our expectations, they can transition between our portfolios, allowing us to remain invested in businesses that continue to meet our criteria and capture their growth potential over a longer time period,” Laird said in a portfolio managers Q&A. The team also manages small-cap Baron Discovery Fund, so Baron SMID Cap ETF serves as a natural extension for the portfolio managers to continue capturing company growth as they grow to a more mid-cap size.

2. Exposure to Innovators

The SMID-cap space is often where disruptive innovation originates, and BCSM’s portfolio can capture these emerging trends. As of February 25, the fund’s top holdings are representative of  this disruption in key areas:

• Defense: Holdings in Mercury Systems (3.0%) and Loar Holdings (2.8%) leverage innovative defensive technology opportunities in the current market, where breakthroughs are transforming the sector and creating structural tailwinds.
• Digital Infrastructure: As the focus on AI-driven platforms continues, top holdings like Dynatrace (3.2%) and Samsara (2.9%) provide foundational capabilities that support the landscape over the long term.
• Consumer Resilience: Changing consumer patterns in the restaurant industry call for brands with staying power, such as Chipotle Mexican Grill (1.8%) and Wingstop (1.6%).

3. Built on Heritage

At 75 basis points, BCSM offers institutional-grade research within the efficiency of an ETF wrapper. What separates BCSM from other SMID cap-focused funds is the foundation it’s built upon: heritage.

Baron Capital was built on a vision for value-driven, long-term investing in small-cap companies.  By channeling these investment principles into the SMID-cap space, the fund can capture growth opportunities that last for generations.

“Our investment approach is closely aligned with Baron Capital’s core philosophy of identifying companies with outsized long-term growth potential, strong competitive advantages, exceptional management teams, and compelling valuations,” Gwirtzman said.

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