The Russell 2000, otherwise known as the small-cap index, is making all-time highs. At its January 2026 peak, the index was up 8%, meaning small-cap stocks were on pace for their strongest start to a year in nearly four decades.
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This surge is being fueled by a combination of improving earnings expectations, the prospect of additional interest rate cuts, and ongoing signs of strength in the U.S. economy.
Small-cap stocks are particularly sensitive to shifts in economic conditions and Federal Reserve policy. As CNBC recently noted, these companies tend to generate more of their revenue domestically, making them more responsive to U.S. growth trends.
History also favors small-cap stocks in easing-rate environments. Because many smaller companies rely more heavily on debt financing, lower interest rates can significantly reduce borrowing costs and improve access to capital. That dynamic can translate into stronger balance sheets and improved profitability. For these reasons, many investors view small-cap stocks as among the biggest potential beneficiaries of future rate cuts.
The Other Side of Small-Cap Stocks
However, if you like to pick your own stocks, that becomes more challenging with small-cap stocks. Many of these stocks are penny stocks, which means they trade at or below $5. Some even trade below $1 (literally penny stocks).
The ability to accumulate a substantial amount of shares at a low price can be appealing. Particularly, if you believe the share price will go much higher. However, many of these stocks are low-priced because they have very little revenue and are not profitable.
That can make owning these stocks more like gambling or buying a lottery ticket. Great if they work out, not so great if they don’t.
Also, many small-cap stocks have very little analyst coverage and little institutional ownership. That means these stocks can be too volatile for risk-averse investors.
Small-Cap ETFs Can Help Manage Risk
A simple way to manage the risk and volatility of small-cap stocks is by owning exchange-traded funds (ETFs). These funds hold a basket of stocks that track specific indexes.
Investors get exposure to dozens of stocks within the fund, and the holdings are balanced on a quarterly basis, so investors don’t have concerns about timing the market.
With that backdrop in mind, here are three small-cap ETFs worth considering.
Vanguard Small-Cap ETF (VB)
The Vanguard Small-Cap ETF (NYSEARCA: VB) tracks the CRSP U.S. Small Cap Index and holds 1,336 stocks. The fund’s holdings include SoFi Technologies (NASDAQ: SOFI), NRG Energy (NYSE: NRG), Atmos Energy (NYSE: ATO), Reddit Inc. (NYSE: RDDT), and Pure Storage (NYSE: PSTG).
One of the most attractive features of the fund is its low expense ratio of just 0.05%. VB also pays a quarterly dividend. Most recently, it distributed just over $0.92 per share on Dec. 24, 2025, following a payout of more than $0.80 on Oct. 1, 2025.
iShares Russell 2000 ETF (IWM)
The iShares Russell 2000 ETF (NYSEARCA: IWM) offers direct exposure to U.S. small-cap companies. The fund tracks the Russell 2000 Index and has a low expense ratio of 0.19%. The fund holds 1,965 stocks, including Credo Technology (NASDAQ: CRDO), Bloom Energy (NYSE: BE), IonQ Inc. (NYSE: IONQ), Fabrinet (NYSE: FN), and Rambus (NASDAQ: RMBS).
IWM also pays a quarterly dividend, with its most recent payment exceeding $0.84 per share on Dec. 19, 2025. Prior to that, it paid just over $0.67 on Sept. 19. 2025.
Scwab U.S. Small-Cap ETF (SCHA)
With one of the lowest expense ratios in the category at 0.04%, the Schwab U.S. Small-Cap ETF (NYSEARCA: SCHA) tracks the Dow Jones U.S. Small-Cap Total Stock Market Index. The fund holds 1,687 stocks, including Reddit, Credo Technology, Affirm Holdings (NASDAQ: AFRM), Bloom Energy, and IonQ Inc.
The Last Word on Investing in Small-Cap Stocks
With the Russell 2000 at record highs and monetary policy potentially turning more accommodative, small-cap stocks appear well-positioned to benefit from a favorable economic backdrop.
Improving earnings expectations, easing financial conditions, and strong domestic exposure all support the case for continued momentum in the space. For investors looking to gain diversified exposure while keeping costs low, ETFs like VB, IWM, and SCHA offer efficient ways to participate in a potential small-cap tailwind as rate cuts move closer into view.
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