Meet the Magnificent Small-Cap ETF Crushing the S&P 500 in 2026. Is It Still a Buy?
Key Points
The Russell 2000 is the primary index for small-cap stocks, similar to the S&P 500 for large-cap stocks.
The iShares Russell 2000 ETF (IWM) has outperformed the S&P 500 since its May 2000 inception.
This small-cap focused ETF is much less reliant on the tech sector than the S&P 500.
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Larger companies tend to get much more attention in the stock market than smaller ones, which makes sense. People interact much more with Apple, Coca-Cola, or Amazon than with a regional mining company, niche pharmaceutical company, or local bank.
However, attention doesn't always translate to stock market performance. There are plenty of small-cap stocks that have performed well and continue to do so. The iShares Russell 2000 ETF (NYSEMKT: IWM) is a good example of this, outperforming the S&P 500 by 20.5% to 7.2% so far this year, as of market close on June 26.
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Given its recent performance, is IWM still a buy? It depends on your objective.
Image source: Getty Images.
A lot of ground covered with one ETF
While the S&P 500 is the main index for large-cap stocks, the Russell 2000 is essentially the equivalent for small-cap stocks. It tracks the 2,000 smallest stocks in the Russell 3000 index, covering a lot of ground across major sectors.
The S&P 500 has become tech-heavy (38.6% of the index), but the Russell 2000 is much more diversified. Its top five most represented sectors are:
- Industrials: 19.1%
- Information technology (tech): 17.6%
- Healthcare: 17.4%
- Financials: 16.4%
- Consumer discretionary: 7.9%
Small-cap stocks are known for being more prone to volatility because they're more affected by broader economic conditions, but investing in a broad small-cap ETF like IWM gives you the best of both worlds. You get the high-growth potential of small-cap stocks without being susceptible to a single company's risk.
How IWM has stacked up against the S&P 500
IWM is outperforming the S&P 500 so far this year, and has outgrown it since it started trading in May 2000, but this past decade has belonged to the S&P 500.
| Index | Annual Average Since Inception | 3-Year Annual Average | 5-Year Annual Average | 10-Year Annual Average |
|---|---|---|---|---|
| IWM | 7.5% | 18.4% | 5.2% | 10.3% |
| S&P 500 | 6.6% | 19.3% | 11.4% | 13.7% |
Data source: YCharts. Returns are through market close on June 26, 2026.
We can't predict how either will perform going forward, but they're both bound to be good long-term investments. The growth of megacap tech stocks is likely to be the reason the S&P 500 outperforms in the near future, but that doesn't diminish IWM's long-term appeal.
Is IWM still a buy right now?
If you're wanting to invest in IWM expecting another 20% returns over the second half of the year, your expectations are probably too high. It's been a great start to 2026 for IWM, but that shouldn't be what's expected.
Other than that, IWM is a good investment because it adds diversification to your portfolio. Unless someone is investing in an all-market ETF like the Vanguard Total Stock Market ETF, it can be easy to focus on large companies and overlook smaller ones.
I wouldn't hold more than 10% of my portfolio in small-cap stocks, but they definitely have a place.
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Stefon Walters has positions in Apple and Coca-Cola. The Motley Fool has positions in and recommends Amazon and Apple. The Motley Fool has a disclosure policy.
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