Small-cap exchange-traded funds (ETFs) have had it rough in recent years. That's partly because the majority of the market's gains have come courtesy of high-flying megacap stocks that, by definition, aren't included in the small-cap benchmark Russell 2000 Index.
Small caps were 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 the Federal Reserve has resumed rate cuts.
Some market participants think small caps will benefit from the second Trump presidency, given the administration's focus on tax cuts, less regulation and economic growth. The Russell 2000 is up nearly 12% for the year to date on a total return basis (price change plus dividends) to trade at new record highs.
“Discount valuations on small caps continue to look compelling," say Glenmede's Chief of Investment Strategy & Research Jason Pride and Vice President of Investment Strategy Michael Reynolds. "Small-cap companies are likely to benefit more from corporate tax relief and lower interest rates while also being less exposed to the impact of tariffs.”
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 $300 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.
Dimensional U.S. Small Cap ETF
- Type: Domestic small-cap growth
- Assets under management: $11.3 billion
- Dividend yield: 0.9%
- Expenses: 0.27%
The Dimensional U.S. Small Cap ETF (DFAS) is one of the several ETFs from Dimensional Fund Advisors (DFA) that used to be a mutual fund but was converted to an ETF structure in June 2021. Today, DFA has 33 ETFs available.
While DFAS has been an ETF for a little over four years, it's been an actively managed fund since December 1998.
The ETF's goal "is to achieve long-term capital appreciation while minimizing federal income taxes on returns," according to the fund site.
Not only does it seek to minimize taxes, but it also manages to keep the fees low despite active fund management. Although actively managed, it seeks to outperform its benchmark, the Russell 2000, which represents 2,000 smaller U.S. companies.
Since the fund's inception in 1998, DFAS has had an annualized total return of 9.3% through August, nearly a percentage point more than the Russell 2000.
The top three sectors by weight are financials (21.2%), industrials (21.1%) and consumer discretionary (14.8%). The portfolio comprises roughly 2,040 companies with a weighted average market cap of $5.6 billion. Its top 10 holdings account for 2.7% of its $10.6 billion net assets.
Regarding valuation, DFAS has a below-category average price-to-earnings (P/E), price-to-book (P/B) and price-to-sales (P/S) ratios.
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SPDR S&P 600 Small Cap Growth ETF
- Type: Domestic small-cap growth
- Assets under management: $3.6 billion
- Dividend yield: 1.2%
- Expenses: 0.15%
The SPDR S&P 600 Small Cap Growth ETF (SLYG), as its name suggests, tracks the performance of the S&P 600 SmallCap 600 Growth Index, a collection of small-cap stocks from the S&P SmallCap 600 Index that exhibit above-average growth tendencies such as improving revenue, price-to-earnings changes and momentum.
To be included in the index, a company must meet a few requirements, including having a public float of 10% or more and the most recent four consecutive quarters of positive earnings.
The growth index is weighted by market cap and rebalanced quarterly, while the S&P SmallCap 600 Index is rebalanced annually on the third Friday in December.
Like many small-cap ETFs — and exchange-traded funds, generally — SLYG uses a sampling strategy to mimic the index's performance. Therefore, not every stock in the index is necessarily held by the fund.
However, the SPDR S&P 600 Small Cap Growth ETF currently has 346 holdings invested in its $3.6 billion in total net assets, roughly the same number of holdings as the index.
The weighted average market cap of SLYG's holdings is $4.5 billion, and earnings for the group are expected to rise by 11% in the next three to five years.
Industrial stocks (23%) make up the largest sector weighting, followed by financials (15.2%) and technology (15.2%). SLYG's top 10 holdings account for 10.4% of its total net assets, with an annual turnover of 53%.
In the past 10 years, SLYG has delivered an annualized total return of 9.7%.
Learn more about SLYG at the State Street Investment Management provider site.
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Avantis U.S. Small Cap Value ETF
- Type: Domestic small-cap value
- Assets under management: $18.5 billion
- Dividend yield: 1.6%
- Expenses: 0.25%
The Avantis U.S. Small Cap Value ETF (AVUV) is one of the largest U.S.-listed small-cap ETFs, with more than $18 billion in assets under management (AUM).
AVUV is actively managed and includes companies with higher profitability and value characteristics using metrics such as the adjusted book value to price and adjusted cash from operations to book value.
Portfolio managers might also consider other factors, including liquidity and past performance, during selection. The fund then weights the individual stocks based on their above ratios relative to other stocks from the Russell 2000 Value Index.
It's unsurprising that financial stocks (27%) top sector exposure in this value-oriented small-cap ETF, followed by consumer discretionary (19%) and industrials (18%).
The top 10 holdings account for just 8% of its net assets, and its turnover is low for active management at 4%.
The average market cap of the 785 holdings is $3.2 billion, and the P/E, P/B, and price-to-cash-flow ratios are less than the category average.
The expense ratio for this active ETF is just 0.25%.
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WisdomTree Emerging Markets SmallCap Dividend Fund
- Type: Foreign diversified small-cap emerging markets
- Assets under management: $1.7 billion
- Dividend yield: 2.7%
- Expenses: 0.58%
The WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) is the first of two international small-cap ETFs featured here. DGS aims to expose investors to dividend-paying small-cap stocks in the WisdomTree Emerging Markets SmallCap Dividend Index.
The index includes companies in the bottom 10% of the WisdomTree Emerging Markets Dividend Index's total market cap. The companies included in the index are weighted based on their annual cash dividends.
The minimum market cap for inclusion is $200 million (PDF), with median daily dollar trading volumes of $200,000 for each of the six months before the screening. In addition, the exposure to any country or sector should not exceed 25% of the portfolio. The index is reconstituted annually in October.
DGS currently has more than 1,000 holdings. The top three countries by weight are Taiwan (25.9%), South Korea (13.8%) and China (9.8%). The top three sectors are industrials (17%), financials (16.7%) and technology (15.%).
The portfolio's top 10 holdings account for just 8.3% of its total net assets, with its largest position — Taiwanese engineering and construction company United Integrated Services — making up 1.4% of the portfolio. DGS has had a turnover rate of 34% in the last 12 months.
Small-cap stocks comprise roughly 47% of the fund's portfolio, midcap stocks account for 52.5% and large caps make up the rest.
Meanwhile, the fund boasts below-category P/E and P/S ratios. The WisdomTree Emerging Markets SmallCap Dividend Fund also has an above-market dividend yield of 2.7%.
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iShares MSCI International Small-Cap Equity Factor ETF
- Type: Foreign small/midcap blend
- Assets under management: $497.3 million
- Dividend yield: 3.9%
- Expenses: 0.23%
The second of two international small-cap ETFs on this list, and the smallest of the six funds featured here, is the iShares MSCI International Small-Cap Equity Factor ETF (ISCF).
ISCF is a passively managed ETF that tracks the performance of the STOXX International Small-Cap Equity Factor Index, a collection of small-cap companies from developed markets that aims to maximize the exposure to stocks exhibiting momentum, quality, value, low size and low volatility.
Launched in April 2015, its annual total return from inception through August is 7.8%.
The ETF has roughly 1,000 holdings with an average market cap of $2 billion, about half the index's average. Its average P/E and P/B are lower than the index's, as well.
Like many small-cap funds, ICSF has a combination of both small and midsize companies in its holdings. Small and microcaps account for about half of the fund, while midcap stocks make up the rest.
The ETF's top three sectors by weight are industrials (21.1%), financials (14.8%) and consumer discretionary stocks (14.5%). The top three countries by weight are Japan (25.4%), the U.K. (12.8%) and Canada (8.8%).
The iShares MSCI International Small-Cap Equity Factor ETF's top 10 holdings account for just 6% of its net assets, and its turnover is just 3.8%.
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Pacer US Small Cap Cash Cows 100 ETF
- Type: Domestic small-cap value
- Assets under management: $4.0 billion
- Dividend yield: 1.0%
- Expenses: 0.59%
The Pacer US Small Cap Cash Cows 100 ETF (CALF) tracks the performance of the Pacer US Small Cap Cash Cows Index.
It's one of the best small-cap ETFs to own because it invests in some of the biggest cash cows. These are companies that generate positive free cash flow, which is the money left after expenses, interest, taxes and long-term investments have been paid.
The ETF takes the 200 stocks from the S&P SmallCap with the highest cash-flow yields, defined as free cash flow divided by enterprise value. These stocks are then weighted based on their trailing 12-month free cash flow.
The index is reconstituted and rebalanced four times a year. The holdings are capped at a 2% weighting. The stocks in the index have market caps from $374 million to $7.7 billion. The weighted average market cap is $7.1 billion, with an average free cash flow yield of 10.7%.
Why is this appealing to investors? Companies with high free cash flow are often the best dividend stocks for dependable dividend growth, while also producing better earnings.
The top three sectors by weight are consumer discretionary (22.6%), industrials (14.3%) and health care stocks (14.0%). CALF's largest three holdings by weight at the moment are United Airlines (UAL), online travel agency Expedia (EXPE) and media giant Fox (FOXA).
Since its inception in June 2017, CALF has had an annualized total return of 7.5% through June 30, 2025. This compares to an 7.4% return for the S&P SmallCap 600 Index.
For those interested in owning more of Pacer's Cash Cow series of ETFs, Pacer has the Pacer Cash Cow Fund of Funds ETF (HERD) that invests 20% in each of five Cash Cow ETFs, including CALF.
Learn more about CALF at the Pacer ETFs provider site.
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