As Small-Cap Outperformance Continues, These 2 ETFs Provide Exposure

Key Points

• In 2026, smaller companies have outperformed large-caps, with the Russell 2000 Index gaining over 13% on the year compared to just over 8% for the S&P 500.
• Small-cap stocks are benefiting from attractive valuation discounts compared to tech giants and are better insulated from geopolitical and tariff risks because they operate primarily within the United States.
• Investors looking to leverage this trend can turn to the growth-focused iShares Core S&P Small-Cap ETF or the highly diversified Vanguard Small-Cap ETF, both of which are seeing heavy institutional buying.

The eye-catching performance of some of the world’s largest stocks has led to them becoming fixtures in investors’ portfolios. Whether that exposure comes via market-cap-weighted funds or direct ownership, the stocks' collective gains have overshadowed the roughly 2,500 other U.S.-listed stocks that do not meet the criteria for inclusion in the S&P 500.

But this year, a dramatic and structural shift in the markets has favored smaller, more nimble firms whose stocks have generated gains that have markedly outpaced their larger peers.

How Small-Cap Stocks Have Managed to Outperform This Year

Small caps generally have market capitalizations that fall between $250 million and $2 billion. For context, NVIDIA NASDAQ: NVDA—the largest publicly traded company on the planet—currently sports a market cap of around $5.41 trillion.

But after years of double-digit gains for the S&P 500, 2026 has been an underdog story for companies that don’t qualify for that index.

That has put a spotlight on small-cap companies, which are commonly tracked through the Russell 2000 Index. The index represents the smallest 2,000 companies in the broader Russell 3000, a market-cap-weighted benchmark designed to measure the performance of the U.S. equity market. So far this year, the Russell 2000’s constituents have contributed to a gain of more than 13%. Meanwhile, the S&P 500’s year-to-date (YTD) gain stands at just over 8%.

One reason why small caps have outperformed the S&P 500 so far in 2026 is that investors began the year by rotating out of Big Tech names. Massive outflows were fueled by fears of a weakening macro environment, runaway valuations, and concentration risks. Those stocks—including some members of the Magnificent Seven—have performed better of late. Nonetheless, those factors remain relevant, as do others that have served as tailwinds for small-cap stocks.

A valuation gap between smaller companies trading at massively discounted prices compared to their S&P 500 counterparts has been a catalyst. That spread sparked a wave of buying as institutional investors looked to use proceeds from tech’s runup in prices and reallocate to underpriced value and growth options in the Russell 2000.

Another major reason why small caps have bested the large- and mega-cap market is that smaller companies are often insulated from the very geopolitical risks and tariff policy fallout that has inflicted uncertainty on the major indices.

U.S.-domiciled small caps tend to conduct much of their business domestically. That has served as a safeguard against the global supply chain disruptions that have plagued multinational companies that are far more sensitive to international trade policies.

For investors looking to add small-cap exposure while hedging against the S&P 500’s relative underperformance, the following two exchange-traded funds (ETFs) have delivered strong year-to-date track records and still have several tailwinds at their backs.

The Largest Small-Cap ETF Zeroes in on Growth

With nearly $100 billion in assets under management (AUM), the iShares Core S&P Small-Cap ETF NYSEARCA: IJR—formerly the iShares S&P SmallCap 600 Index Fund—is the world’s largest small-cap fund.

The ETF has a focus on growth stocks and holds around 650 companies, with a slant towards financials, which make up nearly 22% of the fund by sector exposure. Consumer discretionary, industrials, and tech together account for around 43%, while healthcare rounds out the top five sectors by weight, with an allocation of more than 10%.

The IJR has performed particularly well this year, which can be in part attributed to its more than 10% industry exposure between both semiconductors and semiconductor equipment, and oil, gas, and consumable fuel. So far this year, the ETF has gained around 13%.

After institutional selling outpaced buying in Q4 2025, the fund has seen a reversal in early 2026. During Q1, inflows of $849 million surpassed outflows of just $285 million. Alongside institutional ownership of nearly 67% and current short interest of just 0.96% of the float, the smart money is indicating that it’s bullish on the iShares Core S&P Small-Cap ETF heading into the second half of the year.

This Vanguard Fund Holds a Massive Portfolio of Small Caps

Launched in January 2004, the Vanguard Small-Cap ETF NYSEARCA: VB tracks the CRSP U.S. Small Cap Index, which includes the bottom 2% to 15% of the investable universe.

With nearly $75 billion in AUM, it is competitive with the IJR in valuation.

And while the ETF’s YTD gain of around 10% isn’t quite as impressive as the IJR’s, it is enough to have outperformed the S&P 500 this year.

Where the VB stands out is its sheer broad-based exposure. With 1,315 holdings, more than 18% of the fund’s portfolio is allocated to industrials, nearly 17% to financials, and 15% to tech. Consumer discretionary and healthcare round out the top five sectors at 11.2% and 10.6%, respectively.

Despite its focus on small-caps, it carries some big-time names. Coherent NYSE: COHR, for example, is an industry leader in laser manufacturing and photonics-based solutions. The stock, which plays a critical role in AI infrastructure, has generated a YTD gain of more than 84%.

The Vanguard Small-Cap ETF has seen aggressive institutional buying over the past year, with inflows of more than $28 billion easily surpassing outflows of less than $5 billion. The bulk of that buying came in Q4 2025, when $24 billion was injected into the fund against sales totaling just $1.3 billion. Current short interest is negligible at just 0.16% of the float.