Give the little guy a chance.

Funds tracking the Mag 7, the S&P 500 or any large cap companies are bedrocks in many clients’ portfolios, thanks to their relatively low risk and stable returns over long periods. Meanwhile, many advisors and clients have moved away from small cap stocks and funds that track them due to less-than-stellar returns for more than a decade. However, large cap stocks are currently overvalued by 2%, while small caps are undervalued by 4.6%, according to Morningstar analysts. That could set up a classic “buy low, sell high” investing opportunity.

“Generally speaking, high returns are followed by things with low prices,” said Gregg Fisher, founder of asset management firm Quent Capital. “That’s not rocket science, but it can be hard to execute on.”

Aim Small, Miss Small

Historically, small cap stocks have had the edge over large caps, but they began to lag over the past 10 to 15 years, per Morningstar. So far in 2025, they have significantly underperformed for two reasons: Not getting tailwinds from the AI boom and not being able to roll with the macroeconomic punches as well as their larger cap counterparts. “Small cap stocks tend to be more concentrated on old economy sectors like consumer cyclicals, financials, real estate and industrials,” said Amy Arnott, Morningstar portfolio strategist, adding that small cap companies are also more sensitive to economic weakness.

As a result, small cap mutual funds have had nearly $35 billion in outflows year-to-date, while small cap ETFs are down roughly $17 billion in assets, according to Morningstar data. Out of the five top-performing small cap funds, only two have experienced inflows:

• The Aegis Value Fund Class I mutual fund (AVALX) is the best performer, up nearly 30% this year, and it has taken in more than $140 million in inflows, per Morningstar. The 1290 Essex Small Cap Growth Fund (ESCJX) is up 10% with about $3.5 million in inflows.
• Meanwhile, the Needham Aggressive Growth Fund (NEAGX), the Invesco WilderHill Clean Energy ETF (PBW) and the Jacob Small Cap Growth Fund (JSCGX) are all up more than 12%, but have lost about $50 million in assets cumulatively.

“What we’re seeing is totally normal,” Fisher told Advisor Upside. “When returns are bad over 10 years, you get out, but the formula should be ‘bad 10 years, get in.’ Buying businesses with low prices relative to their fundamentals should be a reasonable thing to do.”

Advisors have increasingly been addressing clients’ cash-flow needs, favoring a curious vehicle that defies sales trends: Active mutual funds.

While cash and cash alternatives are the most commonly used (68%), active mutual funds are second (62%) and have increased in use by 9 percentage points over the past two years, according to survey data published this month by Nasdaq. Among more than 400 advisors who responded, the third most-used vehicle was passive ETFs (58%), followed by individual bonds (57%) and annuity contracts (55%). On average, advisors allocate 29% of assets under management to income-related investments.

“It’s become that ballast in a portfolio that advisors are looking for,” said Jillian DelSignore, head of retail and wealth distribution strategy in the index product management group at Nasdaq.

Actively Waiting

The fact that advisors use active mutual funds for income strategies more than passive and active ETFs shows that issuers can make up some ground, DelSignore said. While ETFs may not be the best fit in every category across income, they generally cost less than the retail and advisor share classes of mutual funds that are available outside of defined-contribution plans. “The active mutual fund uptick does really say advisors still value active management and precision in investing income — and perhaps there is an education gap on the value of an ETF,” she said.

When determining which vehicles to use in the income category, advisors told Nasdaq they turned to:

• Home office recommended lists (44%)
• Wholesaler recommendations (37%)
• Large RIAs that they follow (20%)

Dumptruck of New Products: Because the number of ETFs, particularly in niche categories like covered-call and buffered strategies, has exploded, advisors benefit from outside help to identify which products fit best for clients, DelSignore said. “Advisors are relying heavily on recommended lists, model portfolios and guidance from their issuer salespeople.”

Artificial intelligence has proven to be a competent co-pilot for note-taking, document organization and compliance checks. But if Microsoft’s predictions are right, AI may soon be saying: “I’m the captain now.”

In a recent report, the tech giant ranked 40 jobs by AI applicability, placing advisors at No. 30, between data scientist and archivist. While that may sound threatening given the years it takes to learn the trade and build a book of business, many in the industry aren’t worried about being replaced. Clients still want customized financial plans and a human they can talk to in moments of doubt.

“We saw this with robo advisors in the early 2000s and the 2010s,” said Scooter Thomas, a CFP with Savant Wealth Management. “When someone is putting their life’s savings into your care, they want to be able to call you and ask if everything is going to be alright, and hear an empathetic person on the other end of the phone.”

Mo Money, Mo Problems

Most AI programs excel at pulling and analyzing vast amounts of data. It makes sense for roles like interpreter and translator to be at the top of Microsoft’s list. But financial advising is more nuanced, said Adrian Johnstone, CEO of Practifi, a CRM platform. “Looking back at market trends and the impact of geopolitical events is one part of the equation,” he told Advisor Upside. “The other part is understanding an individual’s needs and drivers.”

Tools like ChatGPT and Gemini can answer basic investor questions, but actual financial planning may still require human assistance. “The more wealth you have, the more important it is to have a human advisor,” said Stephen Caruso, associate director of wealth management at Cerulli. He added that much of an advisor’s value comes from managing emotions, something AI just can’t do right now. Caruso pointed to a recent Cerulli and Edward Jones study showing that advised clients with a financial plan had fewer emotional reactions to this year’s economic turmoil than those without advisors. “Their portfolios were still exposed to intraday market shocks,” he told Advisor Upside, “but from an emotional perspective, they knew where their plans were.”

For any advisor still fretting over AI replacing them, don’t feel too bad. Some have it worse: journalist was No. 16 on the list. *Gulp*.