Inspire Small/Mid Cap ETF (ISMD)
The Inspire Small/Mid Cap ETF (ISMD) invests in smaller and mid-sized American companies—firms with market capitalizations between roughly $500 million and $10 billion—while excluding industries the fund’s sponsor considers ethically problematic. The fund is intended for investors who want exposure to US small and mid-cap equities but are unwilling to own shares in weapons manufacturers, alcohol and tobacco companies, gambling enterprises, or adult entertainment. This combination of size and values-based screening sets ISMD apart from the broader universe of small-cap ETFs, which include all profitable companies regardless of industry.
The screening lens and what it excludes
Inspire Investing, a Colorado-based adviser, publishes a detailed exclusion list. Companies involved in weapons manufacturing (defense contractors that make combat systems), fossil-fuel extraction, conventional or nuclear weapons distribution, alcohol production, tobacco companies or vendors, gambling operators and online-betting platforms, and adult entertainment are systematically excluded from the index. The screens also touch on labor practices, environmental compliance, and board governance, though the weapons-alcohol-tobacco-gambling exclusions are the most transparent and material.
The effect is significant. Depending on market conditions, the exclusions remove 15 to 25 percent of the small-cap universe by market cap. This is especially severe in certain sectors: defense stocks are entirely off limits, which eliminates aerospace and defense suppliers; energy is thinned by the exclusion of fossil-fuel producers; consumer discretionary loses alcohol and gambling names. The fund ends up overweighting healthcare, technology, industrials, and consumer staples—the sectors where ethical manufacturing and distribution are less contentious.
Holdings and composition
ISMD typically holds 250 to 350 stocks, each weighted by market capitalization within the ethical-screen universe. A holding might be a regional healthcare provider, a specialty manufacturing firm, a software company, or a regional financial institution—companies that meet both the size criterion and the ethical screens. The portfolio does not over-concentrate in any single name; the largest holdings are usually 0.5 to 1.0 percent of the fund.
The fund generates modest dividend income from holdings that pay. Unlike pure value strategies, ISMD does not screen specifically for yield, so it captures the income that naturally accrues to mid-cap equities, which tend to be more mature and dividend-paying than small-caps. That yield is usually in the 1 to 2 percent range annually.
Historical context and performance
Values-based screening is neither new nor unique to Inspire. Religious investment funds have excluded alcohol and tobacco for decades; environmental screens have grown sharply in recent years. Inspire’s particular combination—small/mid cap size, rules-based exclusions, transparent methodology—is more recent. The fund cannot be evaluated fairly without acknowledging that excluding entire sectors is a style bet: in years when ethical sectors lag, ISMD will lag; in years when they lead, ISMD will lead. A full-cycle comparison to an unscreened small/mid-cap index is essential.
Costs and trading
The expense ratio is competitive with other small/mid-cap equity ETFs, typically 0.40 to 0.45 percent annually. ISMD trades on the NASDAQ with moderate to good liquidity for most investor sizes. The fund is not tax-optimized in any special way—it will generate capital gains distributions like any diversified equity fund—but the relatively low turnover from the rules-based index methodology keeps tax drag modest.
Risks and limitations
The central risk is that values-based screening creates style and sector bets that may underperform in certain market environments. If defense stocks or energy companies rally sharply, ISMD will lag an unscreened benchmark significantly. An investor choosing ISMD must accept that some of that underperformance is intentional—it is the cost of ethical exclusion—and that other underperformance may simply reflect bad luck or bad timing.
Another risk is definition and mission creep. Inspire’s exclusion criteria are published and relatively stable, but ethical screens are inherently subjective at the margins. A company marginally involved in weapons or extraction can be debated. As Inspire updates its screens—a normal evolution of any adviser’s investment philosophy—existing and prospective shareholders might disagree with specific new exclusions or inclusions.
Finally, small and mid-cap stocks are inherently more volatile and less liquid than large-caps. Combining that structural risk with a values-based screen that further narrows the opportunity set means ISMD is a more volatile and less predictable fund than a broad market alternative.
Who might use ISMD
ISMD suits investors with genuine ethical convictions about weapons, alcohol, tobacco, and gambling, who are willing to accept the performance consequences of excluding those sectors, and who want exposure to smaller-cap US equities. It is not appropriate for purely performance-driven investors, for those seeking to minimize tracking error relative to a broad benchmark, or for portfolios where other holdings already exclude these sectors (to avoid redundancy).
An investor considering ISMD should read Inspire’s detailed exclusion list to ensure alignment with personal values. A comparison of ISMD’s performance and volatility to the Russell 2000 Index—the broad small-cap benchmark—over several market cycles will show the real return and risk drag from ethical screening. Finally, reviewing Inspire’s governance and any updates to the index methodology annually ensures that the fund’s philosophy remains aligned with the investor’s own.