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Special Report
As Small-Cap Outperformance Continues, These 2 ETFs Provide ExposureAuthor: Jessica Mitacek. Article Published: 5/21/2026. 
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.
- Special Report: The Biggest IPO Ever: Claim Your Stake Today
The eye-catching performance of some of the world’s largest stocks has made them fixtures in many investors’ portfolios. Whether that exposure comes through market-cap-weighted funds or direct ownership, their collective gains have overshadowed the roughly 2,500 other U.S.-listed stocks that do not qualify for inclusion in the S&P 500. This year, however, a dramatic and structural shift in the market has favored smaller, more nimble companies whose stocks have posted gains that have outpaced their larger peers. How Small-Cap Stocks Have Managed to Outperform This Year
When the SpaceX IPO launches, most retail investors will be locked out. The banks, funds, and insiders get in early - while everyone else waits on the sidelines.
But one small infrastructure supplier - a critical piece Musk can't scale the Colossus network without - is still trading well under institutional radar. A new briefing reveals the name and ticker at no cost. Get the SpaceX infrastructure stock name and ticker here
Small caps generally have market capitalizations between $250 million and $2 billion. For context, NVIDIA (NASDAQ: NVDA)—the largest publicly traded company in the world—currently has a market cap of about $5.41 trillion. After years of double-digit gains for the S&P 500, 2026 has become an underdog story for companies that do not 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 delivered a gain of more than 13%. Meanwhile, the S&P 500’s year-to-date (YTD) gain stands at just over 8%. One reason small caps have outperformed the S&P 500 in 2026 is that investors started the year by rotating out of Big Tech names. Massive outflows were fueled by concerns about a weakening macro environment, stretched valuations, and concentration risk. Those stocks—including some members of the Magnificent Seven—have performed better recently. Even so, those concerns remain relevant, as do other factors that have continued to support small-cap stocks. A valuation gap between smaller companies trading at steep discounts to their S&P 500 counterparts has been a catalyst. That spread sparked a wave of buying as institutional investors looked to redeploy proceeds from tech’s price runup into underpriced value and growth opportunities in the Russell 2000. Another major reason small caps have bested the large- and mega-cap market is that smaller companies are often insulated from the geopolitical risks and tariff-related fallout that has created uncertainty for 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 and left them far more sensitive to international trade policy. 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 posted strong year-to-date results and still have several tailwinds behind them. The Largest Small-Cap ETF Zeroes in on GrowthWith 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 tilt toward 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 attributed in part to its more than 10% combined industry exposure to 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 appears 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 CapsLaunched 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 competitively priced relative to the IJR. And while the ETF’s YTD gain of around 10% is not quite as strong as the IJR’s, it has still 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 small-cap focus, it still holds some big-name stocks. 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. |
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