This Overlooked Small-Cap ETF Has Crushed the S&P 500 in 2026. Is It Still a Buy Right Now?
Key Points
Investors have rotated into small-cap stocks looking to find more value.
The Russell 2000 is much less reliant on tech performance than the S&P 500.
Investors should still want more S&P 500 than small-cap exposure in their portfolios.
- 10 stocks we like better than iShares Trust - iShares Russell 2000 ETF ›
The S&P 500 (SNPINDEX: ^GSPC) has had a good year, up nearly 13% through Aug. 27. That's above its long-term average, and if it continues through the year, it'll be its fourth consecutive year of double-digit returns.
Although much attention is given to the S&P 500, the iShares Russell 2000 ETF (NYSEMKT: IWM), which mirrors the Russell 2000 index, has slipped under the radar while returning 21.5% this year. It's off to its best start since 2021, but that doesn't mean the momentum is stopping. Investors still have time to add it to their portfolios.
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Diversification is working in IWM's favor
What the S&P 500 is to large-cap stocks, the Russell is to small-cap stocks. IWM holds 1,962 small-cap stocks covering all 11 major U.S. sectors. Here is how the distribution compares to the S&P 500:
| Sector | IWM Percentage | S&P 500 Percentage |
|---|---|---|
| Healthcare | 21.07% | 9.10% |
| Financials | 18.97% | 12.50% |
| Industrials | 13.93% | 8.70% |
| Information technology (tech) | 12.75% | 36.60% |
| Consumer discretionary | 9.24% | 9.40% |
| Energy | 6.49% | 3.40% |
| Real estate | 5.76% | 1.90% |
| Materials | 4.35% | 1.80% |
| Utilities | 2.73% | 2.10% |
| Communication services | 2.37% | 9.90% |
| Consumer staples | 1.97% | 4.70% |
Sources: iShares and Vanguard. IWM percentages as of Aug. 26; S&P 500 percentages as of July 31.
The biggest difference is the tech sector, which makes up much more of the S&P 500. The "Magnificent Seven" stocks alone make up a third of the S&P 500. IWM, on the other hand, is much more diversified. Its top holding is industrial company Moog, at 0.35% of the ETF.
Most people won't know most of the companies in IWM, but it does hold some recognizable ones, such as The Cheesecake Factory (0.17%), Shake Shack (0.9%), Sweetgreen (0.2%), Warby Parker (0.8%), and Cinemark (0.12%).
Image source: Getty Images.
Investors have been seeking more value
With the AI gold rush and surging tech valuations, the S&P 500 is as expensive as it's been since the dot-com bubble. That, along with its high concentration, has led many investors to seek value elsewhere, putting their money into smaller, more reasonably valued companies.
Traditionally, small-cap stocks have their best runs in the earlier parts of economic recovery. However, this is more a case of the group being past due for investor love and a valuation catch-up. It's not just a short-term pop, though. IWM is still a good investment, regardless of immediate market conditions.
It has traditionally underperformed the S&P 500 over the long term, but some exposure to small-cap stocks can help you craft a truly diversified portfolio. I personally try to keep my small-cap exposure below 10% of my portfolio, but that's still enough to capture some of small caps' upside without relying on them too much.
Should you buy stock in iShares Trust - iShares Russell 2000 ETF right now?
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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Warby Parker. The Motley Fool recommends Moog and Sweetgreen. The Motley Fool has a disclosure policy.
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