Baron Capital’s Baron SMID Cap ETF posted a difficult first quarter in 2026, declining 10.56% on a net asset value basis during the period.
The fund significantly underperformed its benchmark, the Russell 2500 Growth Index, which declined just 3.52% over the same period.
This was the first full quarter of results for the Baron SMID Cap ETF, trading under the ticker BCSM, making the underperformance a notable early milestone for the fund.
Baron Capital noted that investors during the quarter gravitated toward a select few companies benefiting from artificial intelligence spending, referred to as “AI winners,” while selling off those considered “losers.”
This dynamic created a challenging environment for bottom-up investors, as market prices diverged sharply from what the fund viewed as fundamental values.
The onset of conflict in Iran further compounded that disconnect and weighed on the portfolio’s overall performance during the quarter.
Among the positions the fund exited was Flutter Entertainment plc (NYSE: FLUT), the New York-headquartered gambling and sports betting giant that owns FanDuel.
In its Q1 2026 investor letter, Baron SMID Cap ETF stated: “Shares of Flutter Entertainment plc (NYSE:FLUT) the world’s largest online sports betting and gaming operator that owns FanDuel, detracted during the quarter and we exited our position.”
The letter noted that “FanDuel’s handle decelerated during the fourth quarter as an extraordinary NFL hold rate created recycling headwinds that persisted longer than expected.”
Baron further explained that “the impact of unfavorable customer outcomes was compounded by ill-timed promotional reinvestment that failed to re-engage customers,” with trends in early 2026 remaining challenged.
The market also discounted the stock on what Baron described as “a $300 million prediction markets investment embedded in 2026 guidance with no offsetting revenue.”
Flutter Entertainment shares closed at $100.70 on June 3, 2026, reflecting a one-month return of -0.49% and a steep 58.50% loss over the prior 52 weeks.
The company carries a market capitalisation of $17.46 billion, a significant reduction from where it stood before the prolonged share price decline.
Hedge fund interest in Flutter Entertainment has also waned considerably, with 57 hedge fund portfolios holding FLUT at the end of Q1 2026, down from 79 in the previous quarter.
Baron SMID Cap ETF focuses on investing in small, fast-growing businesses with durable competitive advantages, exceptional management teams, and compelling valuations, making Flutter’s deteriorating fundamentals a clear mismatch for the fund’s strategy.
