In the current economic climate, characterized by declining interest rates, small- and mid-cap stocks are gaining attention for their potential benefits. According to VanEck, these stocks may outperform their larger-cap counterparts as rate cuts often provide a supportive environment for smaller companies, provided the economy remains stable and avoids recession.

Interest Rate Impact on SMID-Caps

Historically, smaller and mid-sized enterprises have shown resilience and growth in periods of declining interest rates. This trend is largely attributed to their greater flexibility and ability to adapt quickly to economic changes. As larger companies may face challenges scaling down operations, SMID-caps can capitalize on the favorable borrowing conditions that accompany rate reductions.

The Role of Competitive Advantages

The Morningstar US Small-Mid Cap Moat Focus Index, maintained by Morningstar, Inc., tracks the performance of small- and mid-cap companies with sustainable competitive advantages. These companies are assessed to have robust economic moats, making them attractive investments during periods of market volatility. The index is designed to capture the performance of firms that are believed to have enduring competitive edges, which can be particularly beneficial in a declining rate environment.

Sector-Specific Considerations

Investors exploring SMID-cap opportunities should be aware of sector-specific risks. The VanEck Morningstar SMID Moat ETF, for example, is exposed to various sectors including consumer discretionary, financials, healthcare, industrials, and information technology. Each of these sectors may react differently to economic shifts, and investors should consider the unique risks associated with each.

Investment Risks and Considerations

While the potential for growth is significant, investing in small- and mid-cap stocks is not without risks. These companies may experience higher volatility and face challenges that larger, more established firms do not, such as operational risks and market liquidity issues. VanEck advises investors to thoroughly assess the investment objectives, risks, and expenses associated with SMID-cap funds before committing capital.

For more detailed insights on SMID-cap investments and their potential in a declining rate environment, visit the original [VanEck](https://www.vaneck.com/us/en/blogs/moat-investing/three-reasons-to-consider-smid-caps-during-a-declining-rate-environment/) report.

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