Are Small and Mid (SMID) Caps Positioned to Outperform? We Sit Down with Allspring’s John Campbell to Explore.

As interest rates begin to decline, investors are re-evaluating opportunities across the spectrum of US equities. Large cap tech, powered by an overwhelming wave of AI enthusiasm, have outperformed for some time. But Allspring’s John Campbell thinks a reversion to the mean is overdue, particularly with small- and mid-cap (SMID) names. These companies, often more sensitive to borrowing costs and economic inflection points, may be poised for renewed growth. 

Below are the highlights from a lively conversation we had with John discussing their approach for identifying high-conviction names in this category: 

Q: How might recent interest rate cuts by the Federal Reserve (Fed) impact small- and mid-cap equities? Given their higher sensitivity to borrowing costs, could falling rates unlock growth potential for smaller companies?

A: Absolutely. Falling interest rates could be a significant catalyst for small- and mid-cap (SMID) equities. These companies often rely more on floating-rate debt, so lower rates can directly reduce their interest expenses and boost profitability. This improved financial flexibility can allow them to reinvest in their businesses, pursue growth opportunities, and enhance shareholder value. Historically, SMID caps have shown strong performance in environments of declining rates as borrowing costs decrease, and economic activity often accelerates. For advisors, this presents a compelling opportunity to position clients for potential upside as smaller, more dynamic companies may be able to capitalize on these favorable conditions. Given this backdrop, I believe it’s a pivotal moment to re-evaluate allocations.

Q: What structural or thematic trends could serve as catalysts for small- and mid-cap outperformance? Do you see these as potentially overlooked tailwinds that could help drive a re-rating of these asset classes?

A: We see several powerful, and often overlooked, tailwinds that could drive significant SMID cap performance. Reshoring of manufacturing is a major one, creating domestic opportunities that directly benefit smaller US-based companies. Increased M&A activity is another catalyst, as larger corporations with strong balance sheets are often looking to acquire innovative smaller companies to fuel growth. Relative valuations also make a compelling case; SMID caps are trading at a historical discount to large caps, suggesting an attractive entry point. These are not just cyclical trends but also secular shifts. An active approach allows us to identify and capitalize on the specific companies we think are best positioned to benefit from these influential, long-term themes before they become fully appreciated by the broader market.

Q: Allspring’s SMID Core ETF (ASCE) is one of only a handful of active ETFs in this space. What makes your ETF stand out? What are the potential benefits of capturing both the small and mid-cap segments of the US equity market in one fund?

A: We believe ASCE stands out for several reasons. The first point to note is our distinct investment approach. We leverage both quantitative and fundamental analysis to make portfolio investment decisions — a proven strategy that we’ve leveraged for years across multiple vehicle types. Many funds use one method or the other. We use both as an integrated approach. Second is our disciplined, high conviction selection process. ASCE focuses on approximately 50 carefully chosen stocks diversified across major economic sectors. We don’t just buy the index; we systematically target companies with strong value, quality, and momentum characteristics — factors we believe help drive long-term outperformance. We set a high standard for inclusion — it is difficult to be selected for ASCE’s portfolio. 

By combining small and mid-caps into a single fund, we offer investors all the potential benefits that this unique space has to offer, but in a more defined, active solution.  The opportunity set is about 2,500 companies. This provides us with a deep pool of securities to which we can apply our selection strategy, seeking alpha¹ where we believe it exists, without being constrained either by a rigid small- or mid-cap mandate or a narrow growth or value positioning. Finally, ASCE is competitively priced at just 38 basis points², making it a cost-effective solution to gaining access to both small and mid-cap stocks in a single trade. 

Q: How does your approach navigate liquidity challenges in small- and mid-caps during market stress? What risk management advantages does active management provide over passive indexing?

A: Managing liquidity is where our quantitative and active approach can add significant value to investors. It’s a core element of our portfolio management process. We analyze trading volumes and market impact costs daily. This ensures that we invest only in securities that meet our strict liquidity standards. Unlike index-based strategies, we’re not forced to hold or sell illiquid positions during times of market stress. Our active strategy affords us the flexibility to adjust positions in real time, manage transaction costs efficiently, and safeguard capital. While passive strategies are typically more reactive by nature where trade decisions are prompted by scheduled index changes, our active process adds a critical layer of proactive risk management, this is especially important in volatile market environments.

Q: Many advisors struggle with small and mid-cap allocation decisions. What economic indicators guide your current positioning, and how does active management help capitalize on cyclical inflection points?

A: We monitor a range of forward-looking indicators. Key metrics include inflation trends, economic growth, credit conditions, and the slope of the yield curve. These help us manage economic shifts in the market. For example, as we approach a potential easing cycle from the Fed, we recognize that SMID caps have historically performed well. Our dynamic quantitative model is designed to adjust to, and capitalize on, these inflection points. It systematically rotates our portfolio toward factors and industries poised to potentially benefit from the evolving economic environment. This allows us to be nimble and strategic, taking advantage of cyclical opportunities, that a static, index-based strategy would likely miss entirely.

Q: With private markets absorbing many small-cap growth stories pre-IPO, how has active management adapted? What opportunities do you find that passive strategies might miss in today’s evolved SMID landscape?

A: The recent rise of private markets has certainly changed the landscape, but it has also created new opportunities for discerning active managers. While some high-growth companies may stay private longer, the public SMID market remains a fertile environment for finding undervalued, high-quality businesses that passive strategies often overlook. We use our systematic process that’s designed to uncover these hidden gems — companies with strong fundamentals and durable competitive advantages that are positioned for steady, long-term growth. We also find opportunities in names that may be temporarily out of favor or in niche industries that are not well-covered by analysts. When compared to large caps, the small- and mid-cap space tends to exhibit a lesser-degree of market efficiency.  We believe this is an area where active management can be materially impactful: by actively looking beyond the obvious and identifying value.

See how Allspring’s active approach is uncovering potential in small and mid-cap equities.