Big bets are being placed on small-cap ETFs and stocks, and for good reason. Investors are becoming increasingly optimistic that the U.S. economy will remain resilient despite ongoing uncertainty.
When the economy is growing, consumers tend to spend more, businesses invest more, and smaller companies often benefit the most because they are closely tied to domestic economic activity. That optimism has translated into a solid performance for the Russell 2000 Index—widely considered the benchmark for U.S. small-cap stocks. In fact, the index just posted its strongest first-half gain since 1991.
Many of these companies also stand to benefit from the expanding artificial intelligence boom. While large tech firms continue to lead AI development, smaller companies are increasingly supplying the software, equipment, manufacturing capabilities, and infrastructure needed to support the industry. As the AI investment story broadens, small-cap stocks are emerging as an attractive way for investors to participate in the next phase of market growth.
So, what’s the best way to participate in further rallies?
One way is by investing in exchange-traded funds (ETFs), such as:
Why Consider the iShares Russell 2000 ETF?
With a low expense ratio of just 0.19%, the iShares Russell 2000 ETF (NYSEARCA: IWM) provides investors with broad exposure to the U.S. small-cap market. The fund holds approximately 2,000 small-cap companies across a wide range of industries, offering diversification while capturing the growth potential of emerging businesses. Some of its notable holdings include Super Micro Computer (NASDAQ: SMCI), MicroStrategy (NASDAQ: STRK), Carvana (NYSE: CVNA), and Comfort Systems (NYSE: FIX).
The ETF tracks the Russell 2000 Index, one of the most widely followed benchmarks for U.S. small-cap stocks. Because it invests in a large number of companies rather than a handful of individual names, IWM reduces company-specific risk while giving investors access to businesses that are often in the earlier stages of their growth. Small-cap companies have historically outperformed large-cap stocks over certain long-term periods, particularly during the early stages of economic expansions.
Since the start of the year, the IWM ETF rallied from about $246.60 to a recent high of $299.16.
Why Consider the iShares Core S&P Small-Cap ETF?
Another option to consider is the iShares Core S&P Small-Cap ETF (NYSEARCA: IJR). With a low expense ratio of just 0.06%, this ETF provides broad exposure to small-cap companies across a variety of industries. Some of its top holdings include Abercrombie & Fitch, Fabrinet, SM Energy, and Ensign Group, offering investors diversified access to the small-cap segment of the U.S. market. One of the key advantages of investing in IJR is its diversification. Rather than relying on the success of a single small-cap company, investors gain exposure to hundreds of businesses with varying growth opportunities and industry exposure.
The fund tracks the S&P Small Cap 600 Index, which includes companies that generally meet certain financial viability standards before being added to the index. As a result, IJR provides investors with a cost-effective way to participate in the small-cap market while avoiding the challenge of researching and selecting individual companies.
Since the start of the year, the ETF ran from $120.10 to a high of $147.54.
Which Small-Cap ETF Is Right for You?
While small-cap stocks can be more volatile than their large-cap counterparts, the current market environment is creating opportunities that many investors don’t want to ignore. A strengthening economy, continued investment in artificial intelligence, and improving investor sentiment are all helping fuel renewed interest in smaller companies.
Rather than trying to identify the next breakout stock, ETFs such as IWM and IJR offer a simple, low-cost way to gain broad exposure to the sector while reducing the risks associated with owning individual stocks.
