Key facts
- Several small-cap ETFs are outperforming major U.S. stock indexes.
- The Vanguard Russell 2000 ETF (VTWO) has shown strong year-to-date returns.
- The Invesco S&P SmallCap Momentum ETF (XSMO) leads in year-to-date and one-year performance among the discussed ETFs.
- The Schwab Fundamental US Small Company ETF (FNDA) and SPDR Portfolio S&P 600 Small Cap ETF (SPSM) also show significant gains.
- Small-cap stocks are seen as a higher risk/reward trade-off with greater growth potential compared to large-cap companies.
- Market analysts predict potential corrections in the broader market, which could favor small-cap investments.
Small-cap stocks are quietly outperforming major U.S. indexes, a trend that many investors concentrated in large-cap technology may have missed. The Russell 2000 index, which tracks the smallest 2,000 companies in the Russell 3000, has been climbing, signaling a potential shift away from the dominance of mega-cap technology stocks.
Several Exchange Traded Funds (ETFs) focused on small-cap companies are demonstrating strong performance. The Vanguard Russell 2000 ETF (VTWO) has achieved a year-to-date return of 13.2%, surpassing the S&P 500, Nasdaq Composite, and Dow Jones. While VTWO's longer-term performance has lagged, its goal is diversification rather than relying on a few large tech giants.
Other notable small-cap ETFs include the Invesco S&P SmallCap Momentum ETF (XSMO), which has returned 18.30% year-to-date and 44.37% over the past year by focusing on stocks with price momentum. The Schwab Fundamental US Small Company ETF (FNDA) offers a value tilt, weighted by fundamental measures like revenue and cash flow, with an 11.90% year-to-date return. The State Street SPDR Portfolio S&P 600 Small Cap ETF (SPSM), which uses profitability screens, has returned 11.66% year-to-date and boasts the lowest expense ratio at 0.03%.
Investing in small-cap stocks, typically companies with market caps between $250 million and $2 billion, presents a higher risk/reward trade-off. Their smaller size allows for greater growth potential, though they can be more volatile. Analysts like Eddie Ghabour, CEO of Key Advisors Wealth Management, anticipate market corrections this summer following the rapid surge in tech stocks, suggesting that now may be a opportune time to add exposure to smaller companies.