The S&P 500 Index saw double-digit gains in 2025, led by megacap tech stocks, while small-cap stocks lagged behind. Wall Street strategists now see an opportunity in small-cap stocks trading at valuations not seen in decades, offering a potential comeback. Two ETFs, the Russell 2000 Index and iShares Core S&P Small-Cap ETF, provide different approaches to capture this opportunity. Small caps historically outperform after Fed rate cuts, are expected to grow earnings faster in 2026, and offer better value compared to megacaps.

Investors can access small-cap exposure through the Russell 2000 ETF, which tracks approximately 2,000 companies with market capitalizations ranging from $300 million to $2 billion. This ETF provides broad exposure to small caps but comes with higher volatility due to the inclusion of speculative names. Another option is the S&P 600 Small Cap ETF, which tracks a smaller basket of around 600 companies with stricter listing standards, offering a more quality-focused approach.

Small-cap stocks haven’t outperformed the S&P 500 since 2020 and are trading at valuations not seen since 1999. Factors like Fed rate cuts, accelerating earnings growth, and potential M&A activity make small caps an increasingly compelling option for investors seeking diversification away from megacap concentration. 2026 could be the year for small caps to reclaim the spotlight and deliver meaningful returns compared to large caps.

Read more at Barchart: 2 Ways to Trade a Small-Cap Comeback in 2026