High Volatility Stocks Driving SMID Cap Gains in 2025
Within the Russell 2500 Index (SMID Cap), high-volatility small and mid-cap stocks have driven returns year-to-date through September 30, 2025, reversing their long-term pattern of lagging lower-volatility peers. The most volatile deciles have gained more than 40% this year, yet over five- and ten-year periods they have detracted from cumulative index performance.
Much of the rally has been concentrated in U.S. companies tied to artificial intelligence infrastructure, nuclear energy, drone technology, and advanced materials, all areas where price momentum has overshadowed earnings fundamentals.
This momentum-driven backdrop has been a headwind for active SMID-cap managers, who typically emphasize higher-quality companies with steady earnings, strong balance sheets, and sustainable long-term growth. Broad index exposure has outperformed more selective portfolios this year, as returns have been propelled by a narrow group of speculative, high-beta names that fall outside the discipline of most quality-focused strategies.
While such periods of volatility leadership tend to be temporary, they can distort short-term results and challenge managers’ resolve to remain anchored in fundamentals when markets reward risk and sentiment. However, as the chart below illustrates, over longer periods (5- and 10-years) lower volatility outperforms higher volatility.
From a portfolio perspective, maintaining diversified exposure across styles and market segments remains essential, as history indicates that leadership based on volatility and momentum is rarely sustainable once fundamentals reassert themselves.
Source: Factset
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