On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research Todd Rosenbluth discussed the VanEck Morningstar SMID Moat ETF (SMOT) with Chuck Jaffe of Money Life. The pair discussed several topics related to the fund to give investors a deeper understanding of the ETF overall.

Chuck Jaffe: One fund, on point for today. The expert to talk about it. Welcome to the ETF of the Week. Yes, this is the ETF of the Week, where we examine trending, new, newsworthy, unique, and intriguing exchange traded funds with Todd Rosenbluth, the head of research at VettaFi. And at VettaFi.com, you’ll find all the tools and research that you need to make yourself a savvier, smarter investor in ETFs.

Todd Rosenbluth, it’s great to chat with you again.

Todd Rosenbluth: Good to be back, Chuck!

Chuck Jaffe: Your ETF of the Week is…

Todd Rosenbluth: The VanEck Morningstar SMID Moat ETF. Ticker SMOT.

Chuck Jaffe: SMOT, the VanEck Morningstar SMID, which is a small- and midcap Moat ETF. So there’s a lot in there. Is this a play more on the cap sizes, or is this a play on the wide moats, which by the way, you don’t expect a lot of wide moat companies when you go down cap sizes?

Todd Rosenbluth: So, this is the combination. We’ve talked about small- and midcap strategies and how likely they are to do well in a lower rate environment that we’re now in. The Fed has already cut 50 basis points. They’re likely to cut again in the coming days, and maybe even again before the end of the year, and probably again in the next year.

We’re also days before an election, and the data shows that small and midcap companies tend to do better after a presidential election. So we also think that there’s going to be market volatility following the election. So, you should look at small- and midcaps. You should look at higher quality small- and midcaps.

And this VanEck ETF offers that combination, and the index-based approach.

Chuck Jaffe: When you see wide moat in there, though, a lot of things have become factors. We see low volatility or quality or what have you.

Wide moat is a specific thing where a business has a competitive advantage. But is that another way, in your mind, of saying quality?

Todd Rosenbluth: Yes. So, this is a proxy for quality. And quality investing can be measured in a few different ways. This is a qualitative standpoint. Qualitative for quality is a hard thing to say. But you’re getting the benefit of a team of analysts from Morningstar that are assessing the company for their competitive advantages. And then, this ETF also benefits from a valuation assessment that Morningstar is part of.

So, you get quality and value in the small and midcap space. And if you look at the underlying holdings, you see some names you would certainly recognize. Live Nation is in the portfolio. That’s the concert-related company. Expedia. There’s some of the cruise line companies, Carnival, I think, being one of them. So you’re getting to find small and midcap companies, but ones that you’re familiar with, because they have the competitive advantage.

Chuck Jaffe: In terms of where this goes in a portfolio, investors have not loved small-caps for a while because, of course, they have lagged. And it’s been the biggest of the big. But if you have small-cap and you’ve been waiting for it, how does this play if you’ve already got small-cap in your portfolio?

Todd Rosenbluth: So, if you don’t have as much small-cap in your portfolio because you’re concerned about the volatility, a quality filtered small-cap approach like SMOT can make sense. If you do have small-cap exposure, you have it in likely one of two ways.

A low cost, index-based product that just holds companies because they’re relatively small — that might be the Russell 2000 or might be the S&P 600 being the underlying index. This is going to give you a quality filter, and a more concentrated portfolio of some of the names you’re familiar with — not 2000, but a much smaller subset.

Or you might own an actively managed mutual fund that is constrained in how large you can grow, or the handful I think we’ve talked about some active small-cap strategies.

So this can complement any of your existing strategies. But let me get ahead of where you might go. People tend to have a single-digit percentage of their assets in small-cap or small to midcap equities. So you need to be mindful to not overlay too much of a higher-risk part of the portfolio, instead of balancing this out with your large-cap and your fixed income.

Chuck Jaffe: Todd. I know your career. You and I have known each other for a long time. And Morningstar has basically always been a competitor for you. Wherever you’ve been, they’ve been a competitor, and they are with VettaFi. You guys do ETF information and fund information. They do ETF information as well.

Obviously you respect what they do, etc. Is this because their methodology, when it comes to wide moat, is particularly good? They’ve been doing the wide moat thing longer than everybody else?

Todd Rosenbluth: They have a long track record with a large-cap version of the … VanEck has a large-cap moat ETF. The ticker is MOAT. This is the small- and midcap strategy. VanEck offers a great suite of index-based products that gives you U.S. equity exposure. They’re leaning on Morningstar to help from the index construction standpoint and their analytical team. There’s a combination of the human element that you might often find with an active approach, but in an index-based and reasonably priced cost structure of an ETF.

Morningstar has been a competitor of the firms that I’ve worked for in the past. We’re at VettFi. We treat all ETFs equally. We’re fans of index-based products that are tied to a number of different firms. This is a good ETF to consider.

Chuck Jaffe: And you’re fans of great information. And Morningstar provides it as well. Now, that said, as we wrap this one up, and I know it’s always personal, but how much of anybody’s portfolio do you let small-cap be?

Is this a pick where, as we said, if you don’t have much small-cap, you want to lean into it?

But people might be rebalancing around this time if they’re worried about the market. The way large-caps have run, how much small-cap are you comfortable with in a portfolio?

Todd Rosenbluth: So, the average portfolio tends to be 60% equity, 40% fixed income. Most of that tends to be U.S. equity as opposed to international equity. And then most of the U.S. equity exposure is going to be dedicated towards large-caps. So I’m intentionally not naming a percentage. We find that people tend to have a single-digit percentage of their exposure to small-cap U.S. equities.

SMOT can be one of those ETFs worthy of consideration to fill out your well-diversified portfolio.

Chuck Jaffe: So If you want to add to small-caps, it’s the VanEck Morningstar SMID, so small- and midcap Moat ETF, SMOT. The ETF of the Week from Todd Rosenbluth at VettaFi. Todd, great stuff. See you next week.

Todd Rosenbluth: See you next week, Chuck.

Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And I am Chuck Jaffe, and I’d love it if you want to check out my hour-long weekday podcast by going to MoneyLifeShow.com, or by searching for it wherever you find your favorite podcasts.

Now, if you’re searching for great information on your favorite ETFs, look no further than VettaFi.com, where they’ve got a full suite of tools that will make you a better investor. They’re on Twitter at @Vetta_Fi.

And Todd Rosenbluth, my guest here on ETF of the Week, their head of research is on Twitter or X as well. He’s at @ToddRosenbluth.

The ETF of the Week is here for you every Thursday. Make sure you don’t miss an episode by following along on your favorite podcast. We’ll be back next week with another great ETF for your consideration.

But until then, stay safe everybody, and happy investing.

For more news, information, and analysis, visit the Beyond Basic Beta Channel.