Key Points
- The Russell 2000 remains discounted versus the S&P 500, creating a potential opportunity if interest rates begin to fall.
- The iShares Russell 2000 ETF (IWM) offers diversified exposure to small caps, with institutional buying signaling growing interest.
- Stocks like Mueller Water Products and AAON highlight sector-specific growth in infrastructure and data center demand.
- Special Report: The move Washington made in 1934
It's helpful to remember that many of today's top mega-cap companies started as speculative small-cap stocks. But no matter the size of the company, the best stocks are the ones that continue to grow revenue and earnings.
Investors do have to deal with more volatility with small-cap stocks. Even small price moves in these stocks can lead to outsized results. That's because, in many cases, these are companies that are not profitable, and some may be generating little to no revenue. In many cases, these names use debt to grow their businesses.
That wasn't a problem when the Federal Reserve kept interest rates near zero percent. The cost of capital was cheap, and the risks were negligible. However, the cost of capital has increased with higher interest rates, and the latest remarks from Fed chair Jerome Powell implied that the agency is in no hurry to cut rates this year.
It's no wonder then that the Russell 2000 index, commonly referred to as the "small-cap" index, is down slightly this year. However, the index has had a solid three-year run despite an environment of higher interest rates.
Yet the valuation gap between the Russell 2000 and the S&P 500 remains wide. As of March 26, the average price-to-earnings ratio of the Russell was around 19x earnings as opposed to 27x for the S&P 500. That means the Russell 2000 valuation would have to increase by approximately 50% to match that of the S&P 500.
That's why some analysts believe now is the time to get positioned in Russell 2000 stocks. If the market rips higher on there is any hint of lower interest rates, these stocks are likely to catch the interest of investors.
IWM ETF Offers Broad Exposure to Russell 2000 Opportunities
Exchange-traded funds (ETFs) aren't built to beat the market, but they have a place in most portfolios. One choice for investors who want to take a position in small-cap stocks without single stock risk is the iShares Russell 2000 ETF (NYSEARCA: IWM).
As its name implies, this fund is designed to help investors "own the index," similar to how the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) allows investors to get performance that's in line with that of the S&P 500.
Investors may find the composition of the IWM fund interesting. The top four sectors in terms of weighted exposure as a percentage are financials, health care, industrials, and consumer discretionary, each with over 10% of the fund's exposure. That contrasts with the SPY, which has over 31% of its sector exposure in technology.
That could be a signal of where analysts and institutions believe the growth will come from in the coming years. Speaking of institutions, the ratio of institutional buying to selling for this ETF is about 4:1 in the last 12 months. That's a signal that retail investors will want to watch.
Mueller Water Products Taps Into Infrastructure Spending Trends
Looking at the sector exposure of the IWM fund can help you find individual companies within the Russell 2000 that may be poised for strong gains. One of those names is Mueller Water Products (NYSE: MWA). With a market cap of around $4.3 billion on March 26, it's not a small-cap, but it is still small enough for inclusion in the Russell 2000.
Mueller is one of the largest and most critical names in the water infrastructure industry. It has one of the largest installed bases of iron gate valves and fire hydrants in the United States.
The company has posted solid year-over-year revenue and earnings growth that's expected to continue. A key reason for that expectation is the federal government's investment in rebuilding the nation's aging water infrastructure. The majority of Mueller's manufacturing base is in the United States, which makes it an obvious choice for an administration that is looking to keep manufacturing onshore.
That has an additional benefit of limiting Mueller's exposure to imported foreign materials that come with tariff risks.
MWA stock is up more than 16% in 2026, and the analyst forecasts on MarketBeat reveal a consensus price target that suggests more than 10% upside. Plus, with a price-to-earnings ratio around 22, it trades at a slight discount to other industrial stocks.
AAON Stock Gains Momentum From Data Center Demand
AAON Inc. (NASDAQ: AAON) is another mid-cap name that is small enough for inclusion in the Russell 2000. AAON manufactures specialized heating and cooling (HVAC) systems for commercial and industrial applications.
In 2026, that includes data centers. In the company's Q4 2025 earnings report, AAON cited a backlog valued at $1.3 billion. That supports the company's guidance for sales growth between 18% and 20% and gross margins between 29% and 31%. This is another made-in-the-USA story, since the company generates most of its revenue in the United States.
AAON stock has been prone to wide swings in the last 12 months, with over 20 moves of at least 5%. Still, analysts remain bullish with a price target of $107.75, which would be a gain of about 30% from the AAON stock price in late March.
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