When the economy is growing, consumers tend to spend more, businesses invest more, and smaller companies often benefit the most because they are closely tied to domestic economic activity. That optimism has translated into a solid performance for the Russell 2000 Index—widely considered the benchmark for U.S. small-cap stocks. In fact, the index just posted its strongest first-half gain since 1991. 

Many of these companies also stand to benefit from the expanding artificial intelligence boom. While large tech firms continue to lead AI development, smaller companies are increasingly supplying the software, equipment, manufacturing capabilities, and infrastructure needed to support the industry. As the AI investment story broadens, small-cap stocks are emerging as an attractive way for investors to participate in the next phase of market growth.

So, what’s the best way to participate in further rallies?

One way is by investing in exchange-traded funds (ETFs), such as:

Why Consider the iShares Russell 2000 ETF?

With a low expense ratio of just 0.19%, the iShares Russell 2000 ETF (NYSEARCA: IWM) provides investors with broad exposure to the U.S. small-cap market. The fund holds approximately 2,000 small-cap companies across a wide range of industries, offering diversification while capturing the growth potential of emerging businesses. Some of its notable holdings include Super Micro Computer (NASDAQ: SMCI), MicroStrategy (NASDAQ: STRK), Carvana (NYSE: CVNA), and Comfort Systems (NYSE: FIX).

The ETF tracks the Russell 2000 Index, one of the most widely followed benchmarks for U.S. small-cap stocks. Because it invests in a large number of companies rather than a handful of individual names, IWM reduces company-specific risk while giving investors access to businesses that are often in the earlier stages of their growth. Small-cap companies have historically outperformed large-cap stocks over certain long-term periods, particularly during the early stages of economic expansions.

Since the start of the year, the IWM ETF rallied from about $246.60 to a recent high of $299.16.

Why Consider the iShares Core S&P Small-Cap ETF?

Another option to consider is the iShares Core S&P Small-Cap ETF (NYSEARCA: IJR). With a low expense ratio of just 0.06%, this ETF provides broad exposure to small-cap companies across a variety of industries. Some of its top holdings include Abercrombie & Fitch, Fabrinet, SM Energy, and Ensign Group, offering investors diversified access to the small-cap segment of the U.S. market. One of the key advantages of investing in IJR is its diversification. Rather than relying on the success of a single small-cap company, investors gain exposure to hundreds of businesses with varying growth opportunities and industry exposure. 

The fund tracks the S&P Small Cap 600 Index, which includes companies that generally meet certain financial viability standards before being added to the index. As a result, IJR provides investors with a cost-effective way to participate in the small-cap market while avoiding the challenge of researching and selecting individual companies.

Since the start of the year, the ETF ran from $120.10 to a high of $147.54.

Which Small-Cap ETF Is Right for You?

While small-cap stocks can be more volatile than their large-cap counterparts, the current market environment is creating opportunities that many investors don’t want to ignore. A strengthening economy, continued investment in artificial intelligence, and improving investor sentiment are all helping fuel renewed interest in smaller companies.

Rather than trying to identify the next breakout stock, ETFs such as IWM and IJR offer a simple, low-cost way to gain broad exposure to the sector while reducing the risks associated with owning individual stocks.

Those gains disappeared quickly. However, since the beginning of 2024, CVNA stock has been in an undeniable uptrend. It made an all-time high earlier this year and blew past that after the announcement that it would be included in the S&P 500. 

Keep in mind, CVNA stock won’t start trading as part of the S&P 500 until later this month. But it would seem that investors believe that Carvana is headed much higher. 

I’m not so sure. 

Putting aside any macroeconomic arguments (of which there are a few), CVNA stock has made a parabolic move. That usually means that a pullback is likely in the short term.  

The Macroeconomic Concerns 

To be fair, Carvana continues to deliver vehicles at a strong pace, and that’s not something to dismiss. Unit volumes have rebounded sharply from 2022 lows, and management has made strides in reducing reconditioning bottlenecks, improving logistics routing, and tightening inventory discipline. In other words, operational execution is much better than it was during the company’s period of aggressive and unsustainable growth. 

But even strong fundamentals can run into a brick wall if the macro environment turns. And the used car market, while stabilizing, remains tied to interest rate policy, employment conditions, and consumer credit health. 

Auto loan delinquencies continue to rise, particularly for subprime borrowers. According to recent Federal Reserve data, the 90-day-past-due rate for subprime auto loans is at its highest level since before the 2008 financial crisis. Carvana, by virtue of its volume model, has meaningful exposure to this segment. If consumers in the lower-credit tiers continue to struggle, Carvana’s financing arm could see higher default rates and tighter margins—even if unit deliveries remain robust. 

High rates also continue to pressure affordability. The average monthly payment for a used vehicle has remained historically elevated. While the Federal Reserve has signaled the potential for rate cuts in 2026, there’s little evidence that affordability will normalize quickly. Prices may be softening, but that doesn’t automatically translate into healthier buying conditions if financing remains restrictive. 

Then there’s the broader economic question. The labor market is cooling. Wage growth has slowed. Consumer savings are largely depleted from pandemic-era levels. If unemployment ticks meaningfully higher, discretionary categories (and yes, a vehicle purchase can still fall into that camp) tend to show immediate stress.  

Carvana’s core strength is built on the rapid turnover of inventory through a frictionless buying experience. That model works best when consumers feel secure, credit flows freely, and used vehicles retain value. If any of those three supports weaken, the bull case becomes harder to justify in the near term. 

To this point, Carvana’s leadership has been adamant that the company has turned the corner on profitability. And they have—at least on a trailing basis. The shift to a leaner cost structure is real, and investors are right to acknowledge it. But the market is now pricing Carvana as though this profitability inflection is both permanent and insulated from macro risk. That’s a tougher assumption to defend. 

The Valuation Concerns

The cloudy macroeconomic outlook is why you can’t overlook Carvana stock’s extended valuation. It’s trading at over 7x next year’s sales and a price-to-earnings (P/E) ratio of around 104x. That puts it in the category of some of the hottest technology stocks. 

And that could be the point. For some investors, the company does fit into the tech stock category. Supporting that thesis is the company’s return on invested capital (ROIC) of roughly 25% which would, in general, mean the stock commands a higher multiple.  

However, that’s only the case if investors believe that the level of ROIC is sustainable. To be fair, this is a dramatic improvement for the company, which was burning cash prior to 2023, and profitability looked like a pipe dream.  

Carvana has sharpened its underwriting, optimized reconditioning centers, and materially cut SG&A per unit—all of which have driven ROIC into the range that investors typically associate with mature, quality operators rather than growth-at-all-costs disruptors. 

That said, much of the ROIC rebound has been supported by unusually favorable used car pricing dynamics coming out of the pandemic. When used vehicle values were elevated and supply was tight, Carvana squeezed more profit per unit and leaned successfully into high-turn inventory. Now, however, as used car prices continue to normalize and wholesale spreads compress, maintaining a mid-20s ROIC becomes more challenging. 

The company also remains tied to auto credit conditions. Carvana finances a significant portion of the cars it sells. Subprime exposure means that if delinquency rates continue to rise, the company may need to tighten credit standards or absorb higher loss provisions. Either path puts pressure on the very return metrics that are supporting the current valuation. 

Carvana Stock Looks Extended 

The recent spike in CVNA stock has pushed it well above its short- and long-term moving averages. That’s great news if you bought the stock earlier this year, but it’s not a guarantee that new highs are coming. 

For that, you should consider momentum indicators. And in this case, they’re looking a little frothy. The MACD line is solidly green, and the histogram has been expanding. However, a relative strength indicator of approximately 78 places CVNA firmly in overbought territory, suggesting that the next move for the stock is likely to be lower.  

That could be good news for investors who believe in the long-term story because you’ll get a second chance to start a position. But at what price? 

The consensus price target for CVNA stock is $429.04. That’s about 5.9% lower than the stock’s price on December 9. Analyst sentiment has been mixed since the company’s earnings report. That reflects the risk-reward dynamic present in the stock.  

The Bottom Line on CVNA Stock  

If you believe that the company can continue to deliver growth along with operational efficiency, then CVNA stock may be a good investment. However, it’s tough to look past the valuation. 

Carvana, at its current multiple, isn’t valued like a company that will merely hold its ground. It’s valued like one that will continue to improve efficiency even as the macro environment, credit conditions, and used vehicle pricing become less accommodating.