This year’s turbulent market environment underscores the value proposition of actively managed strategies. Active ETFs may offer diversification benefits, a responsiveness to changing market environments, and a depth of fundamental research above and beyond that of their passive peers. This creates the potential for strong performance, particularly in challenging markets. The T. Rowe Price Small-Mid Cap ETF (TMSL) is one such fund outperforming its benchmark year-to-date.
Advisors and investors find themselves navigating unchartered territory in a new U.S. tariff regime. After all, the last time average U.S. tariffs were above 10% was 1946. The inflationary and economic impact of U.S. tariffs, even at current 10% blanket rates, looms over both U.S. outlooks and the world.
Additionally, the everchanging nature of the U.S. tariff policy creates significant challenges for companies. Earnings season has been rife with downgraded forward-looking estimates, and cautious guidance from businesses due to tariff risks.
“The world hasn’t been faced with such enormous potential impacts to trade in more than 100 years, so the only thing we’re certain of is we don’t know which, if any, of our scenarios will play out,” Carol Tomé, CEO of UPS, said in an investor call at the end of April, reported the WSJ.
Look to Active Strategies In Muddled Second Half
Actively managed strategies offer a number of potential benefits in the current market environment. As they are not constrained to an index, these strategies may offer diversification compared to passive funds. It also means many active strategies may prove more responsive to changing market environments. As outlooks evolve, active managers can curate their portfolios to best capture new opportunities and limit new risks.
Active strategies also rely on the knowledge and expertise of their managers and research team when constructing portfolios. In nuanced or more complex asset classes such as SMIDcaps, this often proves a boon. Active managers are able to select companies with promising potential based on bottom-up research. At the same time, they’re able to avoid companies creating significant drag on the asset class.
TMSL currently outperforms the benchmark Russell 2500 Index by approximately 170 basis points, YTD as of May 16, 2025. The fund continues to draw investor attention this year, with nearly $340 million in net flows YTD as of May 16, according to FactSet data.
TMSL Navigates Uncertain Markets While Competitively Priced
TMSL invests in small- and midcap companies. The actively managed strategy focuses primarily on individual company analysis first, but also considers broader trends and market cycles. The managers seek those companies that demonstrate high return on capital, attractive relative valuations and operating margins, and with a solid balance sheet and management.
Companies considered for inclusion also demonstrate earnings and cash flow growth. The management team looks for companies that may demonstrate a competitive advantage that could potentially lead to growth in the near term and across market cycles.
By investing in small- and midcap companies, TMSL adds sector diversification benefits for equity portfolios currently overweight to the technology sector. The fund’s top sectors by weight included industrials at 18.79%, financials at 18.78%, and health care at 13.38%, as of April 30, 2025.
TMSL carries an expense ratio of only 0.55%. It’s competitively priced for a fully active strategy in a nuanced asset class. As evidenced by its performance this year, TMSL demonstrates the value proposition of active management in the SMIDcap space.
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