At a glance
- In their third-quarter 2026 letter, portfolio managers Laird Bieger and Randy Gwirtzman wrote that investors had bought AI-related names "almost exclusively and at essentially any price."
- For allocators, the letter separates the fund's 2026 record into factor exposure and stock picking.
- The fund's software holdings rose nearly 28% in the third quarter, against 3.8% for software in the index, the letter showed.
Baron SMID Cap ETF (BCSM) fell 2.87% in the third quarter while the Russell 2500 Growth Index dropped 10.35%, a spread its managers tie to the AI momentum trade coming apart.
In their third-quarter 2026 letter, portfolio managers Laird Bieger and Randy Gwirtzman wrote that investors had bought AI-related names "almost exclusively and at essentially any price." Higher rates, data-center construction delays and lofty valuations weighed on the trade. BCSM was underweight the groups that fell hardest: semiconductor stocks in the Russell 2500 Growth Index lost 17.9% in the quarter and chip materials and equipment names dropped 23.4%. ETF Trends first reported on the letter.
For allocators, the letter separates the fund's 2026 record into factor exposure and stock picking. Momentum and beta headwinds explained just under 4 percentage points of BCSM's shortfall against the index through Sept. 30, according to the letter. Both reversed in the third quarter, adding about 3 points to relative performance. Active share was 95.7% on Sept. 30, so those style swings reach the fund's returns undiluted.
Chip stocks fell hardest while BCSM held up
Third-quarter 2026 return, %; index groups labelled as such
- Above zero
- Below zero
- BCSM−2.87%
- Russell 2500 Growth−10.35%
- Semis in index−17.9%
- Chip equipment in index−23.4%
Show as table
| Label | Value (%) |
|---|---|
| BCSM | −2.87% |
| Russell 2500 Growth | −10.35% |
| Semis in index | −17.9% |
| Chip equipment in index | −23.4% |
Software up nearly 28% against the index's 3.8%
The fund's software holdings rose nearly 28% in the third quarter, against 3.8% for software in the index, the letter showed. Data backup company Rubrik (RBRK) was the top contributor, adding 1.35 percentage points to the fund's return. The managers wrote that investors began to recognize AI-generated code cannot replace every software company. Their first-quarter letter named the kinds they expect to coexist with large language models: businesses holding private data AI cannot reach, specialized industry software, and products that pair hardware with software.
Defense holdings cut 6.17 points from the quarter
Industrials took 6.17 percentage points off the third-quarter return, mostly in aerospace and defense, according to the letter. Shares of defense supplier Mercury Systems (MRCY) slid on worries about a possible change in congressional control after the midterms. "We think budgets will rise regardless of the composition of Congress," Bieger and Gwirtzman wrote, pointing to missile defense, space, unmanned vehicles and hypersonics as the fast-growing areas their holdings target.
Reported by the Active desk from ETF Trends. Published . Corrections