The Harbor SMID Cap Core ETF (EPSB) experienced a strong first quarter in 2026, outperforming its benchmark, the Russell 2500® Index, by a significant margin. This success was largely driven by strategic stock picks in key sectors, capitalizing on a market that rewarded companies with solid financial health and consistent profitability. The ETF's sector allocations reflect a deliberate, bottom-up approach, favoring Industrials, Information Technology, and Materials, while maintaining an underweight position in Health Care, Consumer Discretionary, and Energy. This commentary provides an overview of market dynamics and the specific factors contributing to EPSB's impressive results.

The broader U.S. Small/Mid Cap equity market experienced considerable volatility during the quarter. After an initial surge of over 8.5% through late February, the market corrected, declining by more than 6.0% to conclude the period. Despite this fluctuating environment, EPSB demonstrated resilience and strategic acumen, delivering substantial alpha relative to its benchmark. This outcome underscores the effectiveness of its investment strategy, which prioritizes fundamental strength and earnings durability in its portfolio companies.

EPSB's Outperformance Amid Market Fluctuations

The Harbor SMID Cap Core ETF (EPSB) achieved a notable 6.96% return (NAV) in the first quarter of 2026, significantly surpassing the Russell 2500® Index's 2.04% return. This impressive outperformance of 490 basis points was primarily driven by exceptional stock selection, particularly in the Information Technology and Materials sectors. The market's focus on companies with robust fundamentals and durable earnings capabilities proved advantageous for EPSB, as its portfolio demonstrated resilience and growth even in a volatile environment. The ETF's strategic overweight positions in Industrials, Information Technology, and Materials, along with underweights in Health Care, Consumer Discretionary, and Energy, reflect a thoughtful, bottom-up investment process rather than explicit sector targeting, allowing for agility in capital allocation.

Amid a backdrop of fluctuating market conditions, where the Index initially surged by over 8.5% before retreating by more than 6.0%, EPSB's investment strategy proved effective. The strong performance was bolstered by key holdings such as Albemarle Corporation, which recorded an approximately 27% gain, benefiting from improved investor sentiment after a period of lithium price corrections. Additionally, FormFactor Inc. delivered strong results, with its earnings exceeding expectations due to robust year-over-year growth in probe cards, essential for testing high-bandwidth memory. These examples highlight EPSB's ability to identify and invest in companies poised for growth, irrespective of broader market movements, reinforcing the value of its active management approach.

Key Drivers of EPSB's Success

The stellar performance of the Harbor SMID Cap Core ETF (EPSB) in the first quarter of 2026 was largely due to astute stock selection, particularly in the Information Technology and Materials sectors. Companies exhibiting strong fundamentals and consistent earnings growth were key contributors to the ETF's 490 basis point outperformance relative to the Russell 2500® Index. This success underscores the efficacy of a bottom-up investment approach, where individual company strengths dictate portfolio allocation rather than broad sector mandates. The ETF's deliberate overweights in Industrials, Information Technology, and Materials, coupled with strategic underweights in Health Care, Consumer Discretionary, and Energy, further optimized its market positioning for growth.

Specific companies within the EPSB portfolio demonstrated exceptional gains, significantly boosting overall returns. Albemarle Corporation, for instance, saw its shares climb by approximately 27% during the quarter. This surge reflected a positive shift in investor sentiment, as market participants anticipated a more balanced supply-demand outlook for lithium following a period of price corrections. Similarly, FormFactor Inc. delivered outstanding results, with earnings that comfortably surpassed expectations, largely driven by strong demand for probe cards used in advanced semiconductor testing for high-bandwidth memory. These individual successes illustrate the fund's ability to identify companies with robust growth catalysts and favorable market dynamics, contributing substantially to its overall strong performance and strategic advantage.