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.

And there are reasons to believe that Affirm has a long runway for growth. For one, Americans are taking on substantial amounts of debt. 

“All major loan categories tracked in the report saw increases as well. Credit card balances topped $1.2 trillion, rising 7.3% from the fourth quarter of last year and logging the smallest yearly increase since 2021,” reported CNN. “Higher levels of household debt are to be expected as they can reflect factors such as population growth, strong economic conditions, holiday-related spending and the rise of e-commerce.”

And second, that means more Americans are turning to buy now, pay later borrowing.

Buy Now, Pay Later Adoption Continues to Accelerate

 U.S. consumers spent roughly $20 billion using BNPL in just the November–December period, nearly 10% higher year over year. 

Zooming out, the long-term opportunity is even more compelling. Global BNPL transaction volume is projected to reach $560 billion to more than $900 billion by 2030, while the U.S. market alone is expected to approach $200 billion by 2026.

And, as noted by MarketWatch, shoppers used BNPL to spend about $20 billion between November 1 and December 31, a 9.8% year-over-year (YoY) increase.

Wall Street is Bullish on BNPL

Wall Street is taking note of those trends. Analysts at Needham upgraded the stock to a buy with a $100 price target. The firm added that, “AFRM has submitted an application to establish Affirm Bank, a proposed Nevada-chartered industrial loan company,” as quoted by CNBC.

In fact, if approved, this would be a game-changer. Owning a banking entity could help lower funding costs, improve margins, reduce reliance on third-party capital markets, and help enhance regulatory flexibility.

JPMorgan Chase & Co. (NYSE: JPM) analysts also upgraded AFRM to market perform, calling it a “long-term secular winner at the expense primarily of the credit card industry.” 

BNPL is a Direct Threat to the Credit Card Industry

BNPL companies like Affirm are a direct threat to the credit card industry. One reason is that BNPL often offers a “free” alternative (no interest for consumers) that draws users away from credit cards, especially for e-commerce. This cuts into fee income for card issuers. 

It’s also important to note that BNPL is becoming very popular among the younger generations. Over half of Gen Z (51%–59%) and Millennials (48%–58%) report using buy now pay later, often making it more common than credit cards for these demographics.

Three, according to a 2025 report from Morgan Stanley, “More than a quarter of U.S. consumers have used ‘Buy Now, Pay Later’ (BNPL), a type of short-term installment loan, to finance purchases. Although BNPL still represents a small share of total U.S. e-commerce sales, it is expanding rapidly: BNPL loans financed 6% of e-commerce in 2024, a jump from 2% in 2020. Additionally, consumers are increasingly using BNPL for everyday items like clothing and groceries, rather than to pay off big-ticket items.”

Investors Can Diversify With an ETF

If you’d prefer to diversify with other BNPL-related stocks, there’s also the iShares FinTech Active ETF (BPAY).  With an expense ratio of 0.55%, the ETF offers exposure to technology disruption around the world and across multiple areas in finance, such as payments, banking, investments, insurance and software. Some of its 37 holdings include PayPal (NASDAQ: PYPL), Charles Schwab (NYSE: SCHW), Capital One Financial (NYSE: COF), Synchrony Financial (NYSE: SYF), Block (NYSE: XYZ) and Global Payments (NYSE: GPN).

As of January 2026, the BPAY ETF trades at $27 a share. The fund is actively managed by BlackRock and has about $9.8 million in total net assets. BPAY seeks to maximize total return by investing at least 80% of its net assets in equity securities of fintech companies that are driving disruption in financial services.

The Trends Line Up in Affirm’s Favor

Rising consumer debt, accelerating BNPL adoption, growing Wall Street support, and a massive long-term market opportunity all suggest that BNPL is not a passing fad—but a structural shift in how consumers pay. 

For one, the BNPL market is expected to rally from a market valuation of about $560 billion in 2025 to more than $1.4 trillion by 2028. 

Second, Americans are taking on substantial amounts of debt. In fact, Americans are seeing total household debt reaching a record high of $18.59 trillion in the third quarter of 2025. 

And third, as a way of managing that debt, more Americans are turning to buy-now, pay-later borrowing.

According to CBS News, “A growing number of consumers are taking out ‘buy now, pay later,’ or BNPL, loans to cover everyday living expenses, data shows, a sign of the precarious financial state facing many U.S. households. A quarter of Americans now use BNPL loans to pay for groceries, up 14% from last year, according to a recent survey from LendingTree.”

In addition, “Americans spent $1.03 billion on Cyber Monday alone using buy-now-pay-later services like Klarna (KLAR), Affirm (AFRM) and PayPal (PYPL) – an all-time high, according to new data from Adobe – and that figure is expected to go even higher,” according to Morningstar. 

So, it comes as no surprise that BNPL stocks are still exploding higher. If you’re looking for opportunities to add to your portfolio in 2026, here are two different options to consider.

BNPL Stocks Option #1: Affirm Holdings

Affirm Holdings (NASDAQ: AFRM) is a financial technology (fintech) company that provides point-of-sale consumer lending and payments solutions for online and in-store purchases. Its core product is a buy-now-pay-later (BNPL) platform that enables consumers to split purchases into fixed, transparent installment loans with no hidden fees. 

Since bottoming out at around $35 in April, AFRM now trades at $71.81, with plenty of upside potential remaining thanks to the BNPL boom and strong earnings.

In its most recent quarter, AFRM’s EPS of 23 cents beat estimates by 12 cents, completing the company’s first full year of profitability. Revenue of $933.34 million, up 33.6% year over year, beat by $49.98 million. Also, during the quarter, AFRM extended its US agreement with Amazon through January 2031. 

Even better, gross merchandise volume (GMV) jumped 42% to $10.8 billion. Direct-to-consumer (DTC) revenue jumped 53% to $3.2 billion. Active users jumped 24% to 24.1 million. And its active merchant count jumped 30% to 419,000 as of late September.

Adding to the bullish story, AFRM stock has a consensus price target of $94.73. That would be a 31.5% gain from the stock’s price as of this writing.

BNPL Stocks Option #2: iShares FinTech Active ETF

If you’d rather have an option that offers diversify at a lower cost, there’s the iShares FinTech Active ETF (NYSEARCA: BPAY). This is an actively managed fund of global companies involved in innovative technologies used and applied in financial services. BPAY was launched on Aug 16, 2022, and is managed by BlackRock.

With an expense ratio of 0.66%, the ETF offers exposure to technology disruption around the world and across multiple areas in finance, such as payments, banking, investments, insurance and software. Some of its 37 holdings include PaylPal, Charles Schwab, Capital One, Synchrony Financial, Block, and Global Payments. 

The fund is up 1.76% year-to-date as of December 18. However, that includes a steep 19% drop-off in the prior three months. Prior to that, the stock had been trading at an all-time high of around $34 in the summer.

With expectations for BNPL payments to continue, the BPAY ETF remains a solid choice for investors.

BNPL Growth Still Has Room to Run

Buy-now, pay-later is no longer a niche payment option—it’s becoming a core part of how consumers manage spending. With household debt at record levels and BNPL adoption accelerating, the long-term growth outlook for the sector remains compelling.

Affirm offers direct exposure to that trend with improving profitability and expanding partnerships, while the BPAY ETF provides a diversified way to participate in fintech innovation. For investors willing to accept volatility, BNPL stocks may continue to deliver significant opportunities as the market enters 2026.

The long-awaited initial public offering (IPO) of Klarna Group (NYSE: KLAR), one of Europe’s leading buy-now-pay-later (BNPL) firms, has reenergized the fintech sector. Klarna priced its IPO at $40 per share, which was higher than its initial target, and opened trading on September 10 at a 30% premium of $52. This klarna ipo is set to reshape the market dynamics.

As we approach the one-month anniversary of Klarna’s IPO, the stock has given back that premium, but still trades around $42. That’s an impressive feat and could indicate that there is strong demand for fintech stocks after a multi-year correction attributed to higher interest rates and tighter credit conditions that pressured earnings.

Investors are closely watching the klarna ipo as it could signal a new era for fintech investments.

If that’s the case, there is a trio of names that are peers of Klarna but are already profitable, have diversified offerings, and are positioned to capture growth from digital commerce and embedded finance trends. 

Reclaiming Its Role as the Fintech Standard-Bearer

Perhaps illustrating the renewed interest in fintech stocks, PayPal Holdings Inc. (NASDAQ: PYPL) stock is up approximately 5% in the last 30 days. But despite this move, the stock is still down about 15% in 2025. If the stock made that 15% gain it would still be slightly below its consensus price target of $84.50, which is an 18% gain from its current level. 

After several years of sluggish growth and margin pressure, the company’s turnaround strategy under CEO Alex Chriss is beginning to show results. PayPal is focusing on operational efficiency, product innovation, and shareholder returns, including a new $5 billion buyback authorization.

The company’s Venmo platform continues to expand its utility, and PayPal’s branded checkout remains one of the most trusted payment methods for online merchants. With new initiatives in AI-driven fraud detection and digital wallet personalization, PayPal is positioning itself for long-term competitiveness. The stock trades at a significant discount to its historical valuation, with a forward P/E ratio around 14, which is in line with the company’s projected earnings growth of approximately 12%. 

Building the Next Generation of Digital Finance

Block Inc. (NYSE: XYZ) stock is also up about 5% in the last week. The company, which was formerly known as Square, blurs the lines between commerce, banking, and cryptocurrency. The company operates as two business units: Seller for merchants and Cash App for consumers. 

Block’s basic premise is that it services smaller merchants that need e-commerce solutions that larger players may ignore. It also serves consumers with minimal banking needs. It’s also focusing more on Bitcoin-related projects, which its target audience may lean into. But it could turn off larger investors. The company’s long-term growth requires that it grow its user base. More revenue will help the company expand its margins. 

To that end, Block believes it has a significant unmet total addressable market (TAM). Lower interest rates could help that. Analysts seem to agree with several higher price targets coming in before the company reports earnings in November. 

Riding the BNPL Wave Back Into Favor

Affirm Holdings Inc. (NASDAQ: AFRM) is the closest stock in this group, which you can say is a comparison to Klarna. However, the halo effect hasn’t emerged yet.  AFRM stock is down 13% in the last 30 days, and it hasn’t enjoyed the bounce in the space. 

With the stock up 24% in 2025, even after the pullback, this could just be a case of profit-taking. The stock has a lofty valuation at over 700x earnings. However, after the pullback, the stock is now about 8% below its consensus price target, and analysts are aggressively raising their price targets on the stock. 

Affirm has built strong relationships with merchants such as Amazon, Shopify, and Walmart, giving it a sizable share of online installment payments. After struggling with rising credit losses in 2022–2023, Affirm has improved its risk management and expanded its recurring revenue through partnerships and its virtual card offerings.