By Suzanne McGee

Jan 16 (Reuters) - Capital Group on Thursday launched its first exchange-traded fund designed to track small and mid-cap U.S. stocks, a segment of the ETF market where new fund launches remain relatively rare.

Of the more than $10 trillion in assets invested in U.S. ETFs, only about $440 billion currently is invested in smaller-cap holdings, said Todd Sohn, ETF strategist at Strategas.

"This is still a space within the ETF area that is full of opportunities," said Sohn.

The Capital Group U.S. Small and Mid-Cap ETF CGMM.P was the last remaining product the firm needed to launch in order to roll out its own model portfolios before the end of the first quarter of 2025, said Holly Framsted, head of ETFs at the Los Angeles-based firm, and one of the products most frequently requested by its clients.

"It's not surprising that we haven't seen innovation in this segment of the market earlier," Framsted added.

There are several reasons for the relatively late arrival on the scene of smaller-stock ETFs, according to Framsted and Sohn.

Most investors gravitate to active stockpicking when it comes to selecting a small-cap fund, Sohn said, because indexes like the Russell 2000 include many unprofitable companies, making index funds tied to them less appealing.

But it has only been five years since the U.S. Securities and Exchange Commission opened the door to actively managed ETFs, and small-cap ETFs are still playing catch-up.

Moreover, running a small stock ETF has unique challenges.

No ETF can close its doors to new investors, as mutual fund managers can do if they do not think the strategy can absorb new capital.

One reason Capital Group has opted to combine small- and mid-cap stocks in the same ETF, Framsted said, is to maximize the team's ability to cope with big inflows.

(Reporting by Suzanne McGee; Editing by Jamie Freed)

((Suzanne.McGee@thomsonreuters.com; 917-285-4385;))