The Quiet Rally in Small Caps Most Investors Will Miss
Back in March, we first talked about international stocks outperforming U.S. stocks and suggested some ETFs for those who were too heavy on U.S. exposure. That thesis has played out well over the past four months—international stocks have continued to beat U.S. stocks.
4 International Value ETFs to Profit as US Stocks Decline
The US stock market continues to slide lower day by day. In recent posts, we've discussed investment ideas outside of US growth stocks, such as consumer staples, gold miners, and European defense stocks. Continuing this trend, we explore international value ETFs as a way to diversify and reduce reliance on US growth stocks.
In this post, I want to highlight another emerging trend that’s worth paying attention to: U.S. small caps are starting to outperform large caps. And that presents a potential opportunity.
Over the past 5 trading days, I noticed that small caps were rising faster than large caps. At the index level, the Russell 2000 gained 1.53%, while the S&P 500 was up just 0.53%, and the tech-heavy QQQ only rose 0.38%. This is a reversal from what we’ve seen for years.
Five days doesn’t make a trend—but zoom out to a month, and the pattern holds. The Russell 2000 climbed 5.23% over the past month, compared to 4.07% for the S&P 500. If we zoom out even further, since the market bottom in March after Trump’s Liberation Day, small caps have been quietly outperforming.
It’s not just a rotation between growth and value—small caps vs. large caps also go through cycles. Historically, small caps outperformed in the 1930s–40s, 1960s, 1980s, and early 2000s. But since 2013, big caps have dominated. This outperformance by small caps might have started just three months ago—and we could be in the early stages of a new cycle.
That said, I’m not a fan of blindly buying small caps. I believe pairing small caps with the value factor gives a better edge. Small caps are often overlooked, under-followed, and underappreciated, making them naturally more undervalued than large caps.
Also, you don’t need to pick individual small-cap stocks—which are often less known and harder to research. ETFs provide a much simpler and diversified way to get exposure.
Today, we’ll focus on U.S. small-cap ETFs, though international small caps have also done very well this year (as we discussed previously).
Here are three U.S. small-cap ETFs suitable for long-term holding: