Small Cap ETFs Outperform as Mega-Cap Tech Stumbles

Smaller stocks have had a strong start to 2026, sharply outperforming their larger counterparts as mega-cap tech names like Nvidia, Meta and Microsoft stumble out of the gate.

ETFs that downplay the very largest stocks have generally done better this year, while those that focus on even smaller companies have tended to do best of all.

The standout has been the iShares Russell 2000 ETF (IWM), which is up 7.3% year to date. That’s a notable reversal for a fund that was deeply out of favor in 2025, when it shed $4.6 billion in assets.

The rally comes despite a long stretch of disappointment. Over the past five years, IWM has gained just 31%, compared with a 91% gain for the S&P 500. Even within the small-cap universe, IWM has been one of the weaker performers in recent years. The fund’s median market cap is about $3.9 billion, less than half the $10.1 billion median market cap of the Vanguard Small-Cap ETF (VB).

Still, small-cap ETFs broadly have done well this year. The iShares Core S&P Small-Cap ETF (IJR) is close behind IWM with a 6.9% gain, while VB is up 6.2%.

Midcap funds have also outperformed. The Vanguard Mid-Cap ETF (VO), iShares Core S&P Mid-Cap ETF (IJH) and SPDR S&P MidCap 400 ETF Trust (MDY) have all posted gains clustered around 6%.

By contrast, ETFs heavily weighted toward large caps have lagged badly. The Vanguard S&P 500 ETF (VOO) is down slightly on the year, while the broader Vanguard Total Stock Market ETF (VTI) is barely positive, with a gain of about 0.3%.

The weakness among the giants is clearest in the iShares S&P 100 ETF (OEF), which is down roughly 2% so far in 2026.

For investors who don’t want to stray too far from the S&P 500 but would like to reduce exposure to the largest names, the Invesco S&P 500 Equal Weight ETF (RSP) has been a popular alternative. The fund has pulled in $4.1 billion of inflows this year, the fourth most of any ETF, and is up 3.3%, well ahead of the traditional market-cap-weighted S&P 500.

YTD Returns 

Whether this shift toward smaller U.S. stocks can persist remains an open question. Investors have been betting on a small-cap comeback for years, with little to show for it.

Since the financial crisis, the biggest stocks, led by mega-cap tech, have dominated returns. While there have been brief periods of small-cap outperformance, none have lasted.

International stocks offer a possible parallel. After lagging U.S. equities for much of the past decade, they surged ahead in 2025 and have continued to outperform in early 2026. The U.S. small-cap versus large-cap gap hasn’t seen a similar sustained reversal yet, but it’s not impossible.

For that to happen, mega-cap tech stocks would likely need to meaningfully falter. Given how large a share they represent of both large-cap benchmarks and the broader U.S. market, their dominance remains the biggest obstacle to a lasting shift down the market-cap spectrum.