Having spent most of 2025 in the shadow of their big-cap counterparts, U.S. small-cap stocks might finally be ready to re-enter the limelight. A combination of friendly policy shifts, overlooked fundamentals, and bullish technical signals is encouraging investors to take a closer look at this long-overlooked asset class, and ETFs are the vehicle of choice for riding the revival.
From the iShares Russell 2000 ETF (NYSE:IWM) to deep-value and innovation-themed plays such as the Acquirers Deep Value ETF (NYSE:DEEP) and Invesco Nasdaq Future Gen 200 ETF (NASDAQ:QQQS), small-cap ETFs experienced a modest uptick in recent weeks. But is this merely a blip, or the start of something greater?
IWM ETF's momentum continues. Track it now here.
Tax Perks And Tech Charts Revive Small Caps
Small caps are gaining increasing investor interest as a combination of strong valuations, favorable tax policy, and improved technicals is starting to alter the narrative. According to on LPL Financial’s Jeff Buchbinder, the Russell 2000’s depressed price-to-book ratio of 2.03 compared to the Russell 1000’s 5.35 points to a stark valuation divide, and the just-signed into law “One Big Beautiful Bill Act” provides tempting tax breaks for smaller companies—such as upfront R&D deductions and 100% bonus depreciation—that would dramatically enhance profitability.
Technically, the Russell 2000 has risen by nearly 30% since its April troughs, indicating a bullish reversal, although it remains in a long-term relative downtrend. Earnings are also catching up, with small caps leading large caps in year-over-year profit growth, although they still lag on beat ratios. Add to that favorable credit conditions and a recovering U.S. dollar, which benefits domestic small caps, and the environment may be ripe for these underdogs to punch above their weight.
ETFs In Focus: How to Ride the Small-Cap Wave
| ETF | Focus | 1-Month Performance |
|---|---|---|
| iShares Russell 2000 ETF | Broad U.S. small caps | +5.3% |
| Pacer US Small Cap Cash Cows ETF (BATS:CALF) | High FCF-generating small caps | +5.2% |
| Acquirers Small & Micro Deep Value ETF (NYSE:DEEP) | Deep-value U.S. small caps | +5.4% |
| Invesco Nasdaq Future Gen 200 ETF | Innovative small-cap growth names | +8.4% |
| Sprott Junior Gold Miners ETF (NYSE:SGDJ) | Small-cap gold miners | +4% |
- IWM is still the standard, with investors having wide exposure to the Russell 2000.
- CALF concentrates on high free cash flow, a key shock absorber in a high-interest-rate environment.
- DEEP is every contrarian’s dream, full of cheap small/micro-cap names.
- QQQS goes all-in on the innovation theme, which is great if you believe that software R&D expensing will ignite a fire under tech stocks.
- SGDJ provides a hard-asset shelter, particularly if inflation returns or gold prices rise again.
Bottom Line: Don’t Sleep On The Small Stuff
Small caps are still lagging behind on the year, with the Russell 2000 up only 0.76% YTD compared to the S&P 500’s 8.8% advancement. But the momentum might be shifting. With tax reform, earnings momentum, and technical trends all in sync, ETFs might be the agile ticket to wager on America’s grittiest stocks.
In a market increasingly dominated by mega-cap narratives, small caps offer something rare: underappreciated potential, and the ETFs to match.
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