Neuberger Small-Mid Cap ETF (NBSM)

“Smaller companies offer the raw material for long-term wealth creation—but only if you can identify the few with genuine competitive advantage among the many seeking survival.”

The Neuberger Small-Mid Cap ETF (NBSM) is an actively managed fund that selects from the universe of US companies between roughly $300 million and $10 billion in market capitalization, using bottom-up fundamental analysis to identify those with durable competitive positions and long-term growth potential.

NBSM launched in March 2024 and benchmarks itself to the Russell 2500 Index, a broad measure spanning the small-cap and mid-cap space. Rather than holding all 2,500 companies in the index equally, Neuberger Berman’s team of three experienced portfolio managers—led by Robert D’Alelio with nearly 50 years of industry experience, supported by Gregory Spiegel and Brett Reiner—conducts proprietary research to select a concentrated portfolio. The managers hunt for companies with sustainable competitive advantages, strong management teams, and stock prices that do not yet reflect their long-term earnings power.

The small-cap advantage and disadvantage

Small and mid-cap equities have historically delivered higher returns than large-cap stocks over full market cycles, reflecting the greater growth potential of younger, smaller enterprises. A regional industrial company or a niche software provider can expand revenue 20 percent annually for a decade; General Electric or Microsoft cannot. Yet this higher growth potential comes with higher volatility and real downside risk. Smaller companies are more sensitive to economic slowdowns, more vulnerable to single-customer or product concentration, and more likely to face capital constraints or management missteps that destroy shareholder value.

NBSM’s active approach aims to exploit this risk-return asymmetry—the managers believe they can identify the winners before the broader market does, and buy them before larger capital allocators pile in. The portfolio concentrates only on holdings the managers judge most attractive; each position typically represents a meaningful conviction bet rather than a fractional sliver of an index-tracking fund.

Sector and value exposure

The fund employs a bottom-up stock-picking method rather than prescribing sector weights. The holdings may tilt toward industrials, healthcare, technology, or financials depending on which small and mid-cap companies the managers believe offer the best risk-reward. Neuberger Berman’s historical philosophy emphasizes value—finding competent, well-managed companies whose shares trade below fair value. This contrasts with pure growth funds that chase companies with rapid earnings expansion regardless of valuation; NBSM aims to buy quality at reasonable prices.

Sector concentration varies, but sectors that employ smaller players—industrials, healthcare, consumer discretionary, and technology—typically feature prominently. By contrast, dividend-heavy sectors like utilities and real estate investment trusts usually represent smaller weights, as the smaller end of those universes is often less stable.

The research edge and track record

The fund’s value proposition rests on the quality of Neuberger Berman’s fundamental analysis and stock-picking skill. Three decades of experience allows portfolio managers to build proprietary networks with company management, to understand industry dynamics deeply, and to spot inflection points before consensus does. Yet active management has a cost: the fund’s expense ratio is not published in the search results, but typical actively managed small-cap funds charge 0.50 to 0.85 percent. Against this cost, the managers must deliver alpha—outperformance above the Russell 2500 benchmark, net of fees—consistently enough to justify shareholders’ trust.

Given NBSM’s recent launch (March 2024), historical track record does not yet exist. Investors must evaluate the managers’ performance at prior firms, their investment philosophy documents, and the current portfolio holdings to assess the likelihood of outperformance. Morningstar and other data providers will publish performance data as the fund ages.

Real risks in small-cap concentration

Concentrated portfolios of small and mid-cap stocks amplify individual company risk. If one holding faces regulatory setback, management scandal, or competitive disruption, the fund’s value can decline sharply. Diversification—a built-in buffer in index funds holding hundreds of companies—is intentionally forgone in pursuit of higher conviction.

Liquidity is another concern. Small and mid-cap stocks trade in lower volumes than large-cap names, which means NBSM’s portfolio positions may widen bid-ask spreads in heavy trading environments or during market stress. Redemptions of the ETF itself could force the fund to sell illiquid holdings at unfavourable prices.

Small and mid-cap stocks are also more cyclical, falling more sharply during economic contractions and recovering more strongly during expansions. This amplified sensitivity to the economic cycle—both up and down—is a structural feature, not a flaw, but it matters for investors who cannot tolerate large drawdowns.

How to evaluate NBSM

Prospective investors should examine the fund’s current holdings and compare the portfolio to the Russell 2500 Index to understand what bets the managers are making—which sectors are overweighted, which underweighted, and why. Reviewing the managers’ previous employment and public letters or commentary on their investment approach offers colour on their philosophy and track record elsewhere.

Once NBSM has published quarterly and annual performance data, comparing its rolling three- and five-year returns (net of fees) to the Russell 2500 Index and to peer small-cap and mid-cap active funds will reveal whether the stock-picking has added value. If outperformance materializes, NBSM becomes a worthy candidate for investors seeking small-cap exposure with an active stock-picker they trust. If NBSM trails its benchmark, the case for holding it weakens—passive small-cap index funds would serve the same purpose at far lower cost.