What is NBSM? (Pros, Cons, and Strategies)

If you're looking for a promising avenue to diversify your investment portfolio, the Neuberger Berman Small-Mid Cap ETF, or NBSM, could be a viable option to consider. This ETF specifically targets the often-overlooked small to mid-cap segment of the market, offering unique growth opportunities. Today, we will examine what NBSM is, as well as its advantages, disadvantages, and some investment strategies.

What is NBSM?

NBSM stands for Neuberger Berman Small-Mid Cap ETF. Managed by Neuberger Berman, a well-established asset management firm, NBSM provides investors with exposure to the small and mid-cap sectors of the U.S. equity market.

Key Features of NBSM

• Focus on Small to Mid-Cap Stocks: The ETF invests primarily in small to mid-cap U.S. companies, which typically have market capitalizations ranging from $300 million to around $10 billion.
• Fundamental and Quantitative Analysis: NBSM employs both fundamental and quantitative analysis to identify high-potential stocks.
• Diversification: The ETF provides diversification across various industries, mitigating sector-specific risks.

NBSM Composition

NBSM includes a broad array of stocks from companies that may not be household names but show strong growth potential. While it tends to have more volatility than large-cap ETFs, this fund includes companies that can offer substantial upside in the long term.

Pros of NBSM

High Growth Potential

Small to mid-cap stocks generally offer higher growth potential compared to large caps. These companies are often still in their growth phase, and some may become the large-cap leaders of tomorrow. This can lead to higher returns compared to more mature, large-cap companies.

Diversification

NBSM provides diversification within your portfolio by investing in a range of sectors, including technology, healthcare, and consumer discretionary. This ensures that your investment is not overly dependent on any single industry.

Active Management

Neuberger Berman employs experienced managers who use both quantitative and fundamental analysis techniques to select stocks. This active management approach aims to identify undervalued stocks with strong growth potential.

Cons of NBSM

Higher Volatility

Small and mid-cap stocks tend to be more volatile than large-cap stocks. This added volatility can result in higher risk, particularly in a market downturn.

Higher Expense Ratio

Active management often comes with a higher expense ratio. The fees associated with NBSM might be higher compared to passively managed ETFs. While the expertise of the fund managers can lead to higher returns, the higher costs can eat into your profits over the long term.

Less Stability

Small to mid-cap companies are generally less stable than their large-cap counterparts. They may have less predictable revenue streams and facial challenges that larger, more established companies do not. This makes NBSM less ideal for conservative investors seeking stable returns.

NBSM Investment Strategies

Long-term Growth Strategy

Given the high growth potential of small to mid-cap stocks, NBSM is generally more suitable for a long-term investment strategy. Holding onto this ETF for an extended period, say 10-20 years, can offer significant returns through capital appreciation and occasionally through dividends.

Dollar-Cost Averaging

To mitigate the volatility, consider employing a dollar-cost averaging strategy. By investing a fixed amount of money at regular intervals, you can reduce the impact of short-term market volatility and lessen the risk of making poor investment decisions based on market timing.

Complementary Strategy

NBSM can act as a supplementary component in a diversified portfolio. By combining it with large-cap ETFs or bonds, you can balance the high growth potential of small-mid caps with the stability of more mature assets. This can help in achieving a more balanced risk-return profile.

Sector Rotation Strategy

Small to mid-cap stocks often perform differently based on the economic cycle. During periods of economic recovery or expansion, they generally outperform large-cap stocks. Investors may consider a sector rotation strategy that involves shifting investments based on the economic cycle to maximize returns.

Conclusion

NBSM is a compelling option for those looking to tap into the high growth potential of small to mid-cap stocks. While it comes with higher volatility and a higher expense ratio, its diversification and active management can offer substantial long-term rewards. Whether as a part of a diversified portfolio or a specific growth strategy, NBSM has the potential to add significant value to your investment journey.