The S&P 500 stands as the ultimate benchmark for investors, a yardstick against which portfolios are measured. Warren Buffett has championed this view for decades, urging everyday investors to stick with it. In his 2016 Berkshire Hathaway shareholder letter, he stated, “Over the years, I’ve often been asked for investment advice. My regular recommendation has been a low-cost S&P 500 index fund.” The logic is straightforward: If you can’t beat the market, just buy the market.
Yet, in 2026, one ETF is shattering that narrative, delivering returns that dwarf the benchmark. The iShares Russell 2000 ETF (NYSEARCA:IWM) is up 6.8% year-to-date while the S&P 500 has slipped 0.1%. Over the past year, the iShares’ ETF edge has endured with a 17.6% gain, outpacing the S&P 500’s 14.9% advance.
Remarkably, the ETF achieves this without the S&P’s heavy tilt toward megacaps like Nvidia (NASDAQ:NVDA | NVDA Price Prediction), Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN). Instead, it taps into small-cap dynamism, proving that overlooked segments can lead when conditions shift.
Small Caps’ Pandemic-Era Struggles
Small-cap stocks have lagged the broader market since 2020, weighed down by a perfect storm of challenges. The pandemic hit these companies hardest. J.P. Morgan Asset Management says small caps carry higher debt loads — often 1.5 times that of large caps — making them more exposed to economic shocks.
Inflation, fueled by expansive government stimulus, added fuel to the fire. As prices spiked, small businesses faced squeezed margins without the pricing power of giants. Then came the Federal Reserve’s aggressive rate hikes, pushing interest rates to 40-year highs. Small caps — reliant on floating-rate debt for growth — saw borrowing costs soar, stifling expansion. Wellington Management notes that these firms are more economically sensitive, underperforming in late-cycle environments with elevated leverage.
The Russell 2000 Index — the iShares ETF’s benchmark — returned just 2.2% annually from 2020 through 2024, versus the S&P 500’s 15.1% average. This prolonged slump left small caps trading at a 20% valuation discount to large caps by late 2024.
Rate Relief Ignites a Small-Cap Rally
The tide began turning in 2025 as inflation cooled and rate cuts materialized. The central bank slashed rates three times that year, lowering the federal funds rate to 3.50%-3.75%. This easing alleviated pressure on small businesses, unlocking access to cheaper capital for hiring and investment, and small-cap earnings rebounded sharply.
T. Rowe Price reports that after three years of declines, Russell 2000 earnings grew 12% in late 2025, outpacing large-cap growth for the first time since 2021. From an April low, small caps surged into January 2026, with improved profitability in sectors like industrials and financials.
Looking ahead, the Fed seems hesitant on cutting rates at its next meeting, but economists project two to three more cuts this year, potentially dropping rates to 2.75% to 3.00%, and boosting small caps further. Lower borrowing costs could amplify their inherent agility, driving outsized gains as domestic-focused firms capitalize on U.S. recovery.
A Low-Cost Bet on Small-Caps
iShares Russell 2000 ETF provides straightforward exposure to this resurgence by tracking the Russell 2000 Index, a market-cap-weighted benchmark of about 2,000 U.S. small-cap stocks. These range from $8 million to as much as $39 billion in market value — which strains the “small-cap” moniker — but span sectors like industrials (19%), financials (17%), and healthcare (17%).
Unlike the tech-heavy S&P 500, iShares’ top holdings — such as Bloom Energy (NYSE:BE) and Credo Technology Group (NASDAQ:CRDO) — tilt toward diversified growth plays, with no single stock exceeding 1% of assets.
The ETF manages $76.2 billion in assets under management (AUM), making it one of the largest small-cap vehicles. Liquidity is robust, with average daily volume topping 30 million shares. Its expense ratio of 0.19% keeps costs low, and combined with quarterly rebalancing, positions the iShares ETF as an accessible tool for capturing small-cap upside without active management fees.
Key Takeaway
Historically, small-cap stocks have outperformed large caps over long horizons, delivering a 2% to 3% annual premium since 1926 — except during adverse conditions like sky-high interest rates that crimp their debt-fueled growth. With rates normalizing and AI spending facing investor scrutiny for diminishing returns, the environment favors small caps’ innovation edge.
The iShares Russell 2000 ETF offers a simple, affordable way to harness this shift, beyond just “buying the market” strategies in the years ahead.
Top Gaining Stocks
Top Losing Stocks