6 of the Best Small-Cap ETFs to Buy Now

Upcoming interest rate cuts have small-cap ETFs primed to outperform.

small-cap stock etf
(Image credit: Getty Images)

Small-cap ETFs are having a tough year. That's partly because the majority of the market's gains have come courtesy of mega-cap tech stocks such as the Magnificent 7

By definition, the small-cap benchmark Russell 2000 index doesn't include Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), Tesla (TSLA) and many other market stars. 

Small caps are also under pressure from high interest rates. Smaller companies rely more on debt than large-cap stocks do, which makes them especially sensitive to rates. They also tend to be heavily reliant on domestic consumer spending, which tends to slow with higher interest rates.

Happily for investors in small-cap stocks, analysts say the asset class is trading at bargain-basement prices, and rates are set to come down.

"Small caps stocks are historically cheap versus just about every other equity asset class," writes Grant Engelbart, investment strategist at Carson Group. "While this large valuation discount does not provide any sense of timing, it is still a tailwind for the asset class."

The strategist adds that small company earnings growth appears to have "troughed over the past year, setting up future year expectations in a big way." According to current estimates, analysts see small-cap earnings growth surpassing that of S&P 500 companies in 2025 and 2026.

Small caps also appear primed for outperformance once interest rates come down, which is expected to start happening at the next Fed meeting in late September. According to CME Group's FedWatch Tool, futures traders are pricing in a roughly 50% chance the central bank will enact at least two quarter-percentage-point rate cuts this year with the first coming on September 18. This means small caps should have at least one catalyst on the horizon.

With that in mind, below are six small-cap ETFs that should be on your radar. 

How we found the best small-cap ETFs to buy

To find the top small-cap funds, we focused on the following criteria: 

  • Net assets of at least $500 million
  • Expenses of 0.60% or less
  • At least two non-U.S. ETFs, including one from emerging markets
  • At least two actively managed ETFs, and
  • ETFs from six different ETF providers 

This methodology provides investors with a portfolio of the best ETFs to buy with sufficient size, lower costs, a mix of passive and active management and geographical diversification.  

Will Ashworth
Contributing Writer, Kiplinger.com

Will has written professionally for investment and finance publications in both the U.S. and Canada since 2004. A native of Toronto, Canada, his sole objective is to help people become better and more informed investors. Fascinated by how companies make money, he's a keen student of business history. Married and now living in Halifax, Nova Scotia, he's also got an interest in equity and debt crowdfunding.