What are we looking for?
Canadian-domiciled mutual funds and exchange-traded funds in the small- or mid-cap space that have outperformed peers.
The screen
For much of the past two years, equity performance has been unusually concentrated. A narrow group of megacap growth stocks powered headline indexes, while participation of smaller stocks beneath the surface remained thin.
That concentration now appears to be easing. Recent data point to improving breadth. Equal-weight indexes have begun to outperform their cap-weighted counterparts. Small- and mid-cap benchmarks are contributing more meaningfully to returns. Leadership is no longer confined to the largest names. In other words, more stocks are doing more of the work.
Canadian investors saw a version of this dynamic last year. In a report entitled Gold’s Record-Breaking Year in Canada, Morningstar’s Kimberly Hart detailed how gold’s price rally materially boosted domestic equity returns. Gold equities were not a sideshow – they were central to index performance. The message was simple: Index composition matters, and leadership can shift quickly.
If you believe the market backdrop remains broadly risk-on, but increasingly diversified, selective exposure to small- and mid-cap funds may warrant consideration. Historically, these segments benefit when earnings momentum broadens and capital rotates beyond dominant megacaps. Valuation gaps can narrow as investors reassess relative opportunity.
However, this opportunity comes with clear risks. Small- and mid-cap equities are inherently more volatile. Earnings streams are less diversified. Liquidity is thinner, with wider price spreads and sharper price moves.
For retail investors, building and monitoring positions in individual stocks can be operationally challenging – which is where managed vehicles such as mutual funds and ETFs can help mitigate idiosyncratic and liquidity risks. Even so, for more conservative investors, this space should represent a satellite allocation within a diversified portfolio.
With this in mind, I used Morningstar Direct to screen for Canadian-domiciled mutual funds and ETFs that:
- Follow a small or mid-cap mandate.
- Have received a 5-star Morningstar Rating for Funds (Star Rating), indicating historical outperformance versus peers on an after-fee, risk-adjusted basis. The rating uses up to 10 years of performance history, with greater weight placed on the most recent three years.
- Have earned a Morningstar Medalist Rating of bronze, silver or gold, reflecting Morningstar’s view that the fund has the ingredients to outperform peers on an after-fee basis going forward. This assessment incorporates our evaluation of parent (stewardship quality), people (portfolio management experience), and process (the robustness and repeatability of the investment approach).
What we found
The accompanying table is organized by category, isolating the geographic exposure of each portfolio, alongside management expense ratios, trailing returns, Morningstar Ratings and sector exposure. Readers will notice that sector exposure varies by region. Canadian funds, for example, tend to have higher exposure to basic materials – including gold and precious metals – reflecting the structure of the domestic equity market.
This article is provided for informational purposes only and does not constitute financial advice. Investors should conduct their own independent research before buying or selling any of the investments listed.
Ian Tam, CFA, is director of investment research for Morningstar Canada.