Small-cap exchange-traded funds have experienced a historic rally, with the Russell 2000 index outperforming the S&P 500 so far this year [1, 2].
This shift marks a significant departure from previous market trends where a small group of mega-cap technology stocks dominated growth. The rally suggests a broadening of the market recovery, signaling that investors are finding value in smaller companies as macroeconomic conditions shift.
Phil McInnis, chief investment strategist at Avantis Investors, and Matt Bartolini, global head of research strategist at State Street Investment Management, said Monday on CNBC's "ETF Edge" [1]. The analysts said that several small-cap ETFs have posted strong gains during the 2026 calendar year [1, 2].
Specific performance data highlights the scale of the bounce. The iShares Russell 2000 ETF has seen a 26% gain year-to-date [2]. Additionally, the Avantis International Small-Cap Value ETF (AVDV) has surged 61% over the past year [3].
Several catalysts are driving this momentum. Analysts said broader earnings growth extends beyond the "Magnificent Seven" technology giants [3, 2]. Falling interest rates have also provided a tailwind, as smaller companies typically carry more floating-rate debt and are more sensitive to borrowing costs [3, 2].
Currency fluctuations and global trends are further contributing to the surge. Experts said dollar weakness and declines in international interest rates are key drivers for the rally [3, 2]. These factors combined have made small-cap assets more attractive to both domestic and international investors.
Host Dominic Chu led the discussion from CNBC's New York studios, focusing on the sustainability of the trend as the market moves through July [1].
“The Russell 2000 index outperforming the S&P 500 year-to-date”
The transition from a concentrated market—dominated by a few tech giants—to a broader rally in small-cap stocks indicates a shift in investor risk appetite. When small-cap ETFs outperform, it often suggests that the broader economy is stabilizing, as these companies are more tethered to domestic economic health and interest rate sensitivity than global conglomerates.
