Small Caps Are Beating Large Caps in 2026. Here Are the 2 ETFs Built to Ride It.

By David Beren Published Mar 24, 1:02PM EDT

Quick Read

Small-cap ETFs iShares Russell 2000 (IWM) and iShares Core S&P Small Cap (IJR) are outperforming the S&P 500 year-to-date as tech weakness drives a rotation toward smaller, domestically-focused companies; IJR’s profitability screen and 0.06% expense ratio make it superior for long-term holders versus IWM’s 0.19% ratio and 40% unprofitable companies. Vanguard S&P 500 ETF (VOO) is being dragged down by tech’s underperformance, which represents roughly a third of the index.
Small-cap funds are benefiting because technology stocks represent far less exposure in their portfolios than in mega-cap benchmarks, combined with historically cheap valuations relative to the S&P 500.
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Small Caps Are Beating Large Caps in 2026. Here Are the 2 ETFs Built to Ride It. — © bangoland / Shutterstock.com

The S&P 500 is down on the year through late March, but surprisingly, small caps are not. This divergence, while not dramatic in size, reflects something more meaningful happening underneath the surface with a rotation away from the mega-cap technology leadership and more toward smaller, more domestically focused companies that have been waiting in the wings for years.

The iShares Russell 2000 ETF (NYSE:IWM) is down 1.60% year-to-date as of March 19, a rougher run than it sounds, given how badly large-cap tech has weighed on the broader market. The iShares Core S&P Small Cap ETF (NYSE:IJR) is up 0.19% over the same period, a meaningful gap in relative terms. Both numbers have moderated from the more pronounced small-cap lead seen in January and February, as markets pulled back broadly in March, but the rotation is real, and understanding why it happened is the more useful story.

The Same Category, Two Very Different Funds

While both funds own small-cap U.S. stocks, this is pretty much where the similarity ends. The iShares Russell ETF holds 1,948 companies and tracks the Russell 2000, the most widely cited small-cap benchmark in the world. The index has no profitability requirement, and roughly 40% of its holdings are companies that are currently losing money. Industrials lead the sector mix at 18.36%, followed by Healthcare at 17.53%, Financials at 16.94%, and Information Technology at 14.48%.

The expense ratio is 0.19%, and with $69 billion in assets and daily volume in the end of millions of shares, it’s the most liquid small-cap vehicle on the market. Now, compare this to the iShares Core S&P Small Cap ETF, which holds 567 companies and tracks the S&P SmallCap 600.

The key difference here is the profitability screen, as a company must demonstrate positive earnings before it can be included in the index. This one single requirement changes the character of the fund in a meaningful way. The iShares Core S&P Small Cap ETF does closely mirror its holdings to its rival, with Financials holding at 18.14% of the fund, Industrials at 17.51%, Consumer Discretionary at 13.62%, and 12.80% for Information Technology.

However, the quality filter means you’re not carrying dead weight from any money-losing companies along for the ride. On top of that, the expense ratio at 0.06% is one of the lowest of any ETF available.

Why Small Caps Are Working Right Now

Technology stocks have been the worst-performing S&P 500 sector through early 2026, and this is a core driver as tech makes roughly a third of cap-weighted index funds like the Vanguard S&P 500 ETF (NYSE:VOO), a meaningful drag when the sector is underperforming.

Small-cap funds like the iShares Russell 2000 ETF and the iShares Core S&P Small Cap ETF carry far less exposure to technology by design, which has helped insulate them from any headwinds. The valuation case adds another layer as smaller caps are trading at a significant discount to large caps by P/E ratio, a gap that is near historic highs.

The iShares Russell 2000 ETF currently trades at a P/E of 17.69, while the iShares Core S&P 500 Small Cap ETF sits at 17.00. Both are considerably cheaper than the S&P 500 on an earnings basis, and when economic growth broadens beyond a handful of mega-cap companies, smaller businesses with operational leverage tend to benefit the most.

Which One Belongs In Your Portfolio

For most long-term investors building a core allocation, the iShares Core S&P Small Cap ETF makes the stronger case. The profitability screen has historically produced better risk-adjusted returns than the Russell 2000 over long periods, and the expense ratio of 0.06% is nearly three times cheaper. The quality tilt means the fund holds companies that are actually generating earnings, and not just occupying space in an index.

The iShares Russell 2000 ETF serves a different purpose as the institutional benchmark for small-cap exposure. This makes it a reference point for options traders, hedge funds, and professional investors who need to track or hedge against the Russell 2000 directly. The liquidity here is unmatched, and for tacticians or active traders, that depth matters in a long-term buy-and-hold investor doesn’t necessarily need.

Own the iShares Russell 2000 ETF if you need the benchmark, or own the iShares Core S&P Small ETF if you want the better, more long-term holding.

About the Author David Beren →

David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com.

As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year.

In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.