ETF Pulse Check Navigating the Dynamics of Congress SMid Growth ETF

The Congress SMid Growth ETF (CSMD) focuses on long-term capital appreciation by investing in small- and mid-cap companies poised for earnings growth. With a primary emphasis on domestic small- and mid-cap growth stocks, the ETF employs a growth style and bottom-up, fundamental research strategy. Its stock selection criteria prioritize high-quality companies with above-average earnings growth, free cash flows, and prudent debt management. While the ETF's core investments encompass common and preferred stocks as well as ETFs, it can allocate up to 20% of its portfolio to ADRs and GDRs representing foreign securities. The fund also has flexibility to invest in large-cap companies, with exposure capped at 20%. This strategy is underpinned by a vigilant approach to divesting stocks when growth indicators falter or investment rationale shifts. Given the current market environment, CSMD's focus on quality growth companies makes it particularly relevant as investors seek resilience amid economic uncertainties.

Basic Information
The Congress SMid Growth ETF, identified by its ticker code CSMD, is issued by Congress Asset Management Company, LLP, and was launched on August 21st, 2023. It carries an expense ratio of 0.68%, which places it at the higher end of the cost spectrum. The ETF's top 15 holdings reflect a diverse portfolio with Comfort Systems USA (FIX) holding the largest weight at 5.19%, followed by Curtiss-Wright (CW) at 4.44%, and Sterling (STRL) at 3.77%. The largest sector exposure is in Industrials at 18.6%, with significant allocations in Information Technology, Consumer Staples, and Consumer Discretionary. The fund's 7-day and 30-day net flow ratios stand at 0.11% and 0.15%, respectively. Performance metrics show a 6-month average return of -0.91%, a 1-year average return of 6.02%, and a 3-year average return of 4.88%, with corresponding volatility levels of 5.71%, 8.63%, and 7.65%. Notably, the 1-year and 3-year maximum return drawdowns are both recorded at 0.97%.

News Summary
Recent developments in the industrial sector, where CSMD has its largest exposure, highlight dynamic market conditions. The sector is witnessing growth amid geopolitical tensions, as seen with companies like Fastenal reporting higher earnings due to increased sales. However, challenges persist with rising tariffs and inflation impacting supply chains. On a macroeconomic level, inflationary pressures are mounting, potentially leading to interest rate hikes that could affect consumer spending, a critical factor for CSMD's consumer-centric holdings such as BJ's Wholesale Club and e.l.f. Beauty. Additionally, the ongoing US-China trade tensions and regulatory challenges, particularly concerning AI technology, pose risks to technology holdings like CyberArk Software and PTC.

Analyst Rating: Sell
The Congress SMid Growth ETF (CSMD) presents a cautious investment outlook. Although it offers a diversified portfolio, the expense ratio of 0.68% is relatively high, potentially deterring cost-conscious investors. The ETF's recent performance has been lackluster, with the 6-month average return in negative territory and modest returns over 1-year and 3-year periods. Despite the low volatility and the ETF's well-managed premium stability, these factors do not compensate for the underwhelming performance and higher costs. Therefore, the recommendation is a 'Sell' rating, advising investors to proceed with caution.

Backtest Scenario
A backtest of the Congress SMid Growth ETF (CSMD) against the industrial sector performance during the 2018 U.S.-China trade war reveals that CSMD underperformed significantly. The ETF experienced a peak-to-trough decline of approximately 25%, compared to a more moderate 15% decline in the broader industrial sector. This disparity underscores the increased volatility and risk associated with CSMD's focus on smaller to mid-cap companies during periods of heightened trade tensions.

Risk Outlook
The Congress SMid Growth ETF (CSMD) faces notable risks primarily stemming from its industrial sector exposure, which constitutes 18.6% of its holdings. Geopolitical tensions and trade disruptions, such as those between the US and China, present significant threats to industrial holdings like Curtiss-Wright and Valmont Industries. Rising inflation and potential interest rate hikes could further dampen consumer spending, impacting consumer-related holdings. Technology stocks within the ETF are susceptible to regulatory changes and market access challenges, particularly with ongoing discussions around AI technology. Despite moderate return volatility, liquidity risks remain, as indicated by muted net flow ratios. The ETF's concentration in top holdings, with Comfort Systems USA leading the way, could amplify sector-specific downturns, necessitating careful monitoring of market developments.

Conclusion
The Congress SMid Growth ETF (CSMD) is best suited for aggressive investors who are comfortable navigating the complexities of small- and mid-cap growth stocks amid volatile market conditions. Investors should closely monitor macroeconomic indicators such as inflation, interest rate trends, and geopolitical developments to assess potential impacts on the ETF's performance.