Is Now a Good Time to Buy Small-Cap Stocks?

Two fish bowls sit side by side: One has four small fish, and one has one big fish.

(Image credit: Getty Images)

Turbulent markets are hard to stomach, but they offer bargains that can set up your portfolio for better returns over the long run. In the market's recent tumble, small- and mid-cap stocks have been among the hardest hit. Is it time to bargain hunt?

On-again, off-again policies from Washington, the onset of global tariff salvos, and flagging consumer and business confidence have fueled recession fears and rocked the stock market.

From its peak earlier this year, the large-company S&P 500 Index fell 17.5% through April 7 (the date for all returns in this story unless otherwise noted). Shares in small and midsize companies have been hurting more and for far longer.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

After peaking in November, small-cap stocks, as measured by the Russell 2000, slipped 25.5%. That's bear-market territory, defined as a drop of 20% or more. The Russell Midcap Index fell 19.4%.

Small- and mid-cap indexes initially bounced higher on news of a delay in the implementation of some of the proposed tariffs, but not quite as high as their large-cap counterparts.

Sustained rebounds in small- and mid-cap stocks have been elusive in recent years. These days, relative to large-company stocks, both midsize and small shares are less expensive than they've been in decades.

Prices can fall further, of course. But at these levels, "if you're wrong, you're falling out the first-floor window and cutting your knees. You're not going to get killed," says Bill Hench, who heads the small-company team at investment firm First Eagle.

Two key stressors for smaller companies – high interest rates and rising inflation – have eased significantly from peak levels, even if progress has stalled recently. And lower corporate tax rates and looser regulations, if those initiatives come to pass, would be a boon to smaller firms.

But ongoing worries abound that a trade war and mass layoffs of federal employees could usher in an economic slowdown and push stock prices even lower.

For that reason, it pays to be selective. For example, a bigger tilt toward midsize companies may offer a good balance between the potential for big returns if the economy grows apace and providing more stability than small caps if the economy falters.

Below, we've highlighted a few mutual funds and exchange-traded funds to get you started.

Tilt toward mid caps

Some strategists favor mid caps over small stocks for now, in part because mid caps have a quality edge.

Midsize firms are more established than small ones, for a start. Typically, mid caps have a product or service that's in demand, as well as a management team that has ably steered the company.

Chances are they're profitable, too: 85% of the companies in the Russell Midcap Index post positive earnings, compared with fewer than 60% of the Russell 2000 firms.

Finally, though ahead of small caps on many measures, midsize firms still have a long runway for growth, says Kirk McDonald, head of SMID cap strategies at Argent Capital Management.

Wells Fargo Investment Institute strategists recently upgraded mid caps to "favorable" from "neutral."

The stock market pullback will be transient, says Sameer Samana, WFII's head of global equities and real assets, who supports an aggressive tilt to midsize firms. In a moderate portfolio, that means a 14% stake in midsize companies, up from 10%, he says.

The firm's year-end target of 4,200 for the Russell Midcap benchmark represents a potential gain of roughly 35% from its closing value on April 7.

Funds we like include DF Dent Midcap Growth (DFDMX), which favors growing companies with sustainable earnings that dominate their business, and Heartland Mid Cap Value (HRMDX), which invests in bargain-priced firms.

Both are members of the Kiplinger 25, the list of our favorite actively managed, no-load mutual funds, and have held up better than the Russell Midcap Index and the typical mid-cap fund since the start of the sell-off.

The downturn "brings a return to paying a reasonable price for things," says Heartland Mid Cap Value's Colin McWey.

He says he is finding opportunities in industrial and tech shares, and he adds that a handful of health care and consumer stocks in the fund, such as Quest Diagnostics (DGX) and Kimberly-Clark (KMB), are starting to "wake up" after lagging last year.

The managers at DF Dent Midcap Growth "prioritize boring," says co-manager Michael Morrill, and that has helped the fund during the sell-off. Top holding Ecolab (ECL), for instance, has held up well since the start of 2025, with a 1.4% decline, while the Russell Midcap Index is down 13.3%.

At FAM Dividend Focus Fund (FAMEX), quality is key: The managers look for companies whose rate of return on invested capital (a profitability measure) is increasing.

Every company in the portfolio pays a dividend, too, though payout growth is the focus, not high yield. The fund's 4.7% three-year annualized return outpaced 89% of its peers and the index.

Top holdings include insurer Arthur J. Gallagher (AJG), up 28% over the past 12 months, and Heico (HEI), an aerospace and defense company, up 25%.

Don’t ignore small caps

group of small fish shaped like a big fish chasing a shark

A bet on small caps feels contrarian in light of recession worries, because these stocks are particularly sensitive to the economy. What's more, tariffs and immigration reforms could impact small companies more than large and midsize firms, say BofA Global Research analysts.

But prices are so battered that "they present great long-term opportunities," says Megan Horneman, chief investment officer at Verdence Capital Advisors. "If you have a long time horizon, then you should be adding to small caps."

Aim for a 3% allocation to small stocks in your portfolio. To offset risk, seek funds that favor quality traits, value-priced shares and dividends.

T. Rowe Price Small-Cap Value (PRSVX), another Kip 25 fund, has held up better than the Russell 2000 since November. Over the past year, the fund's 8.2% decline is better than the index's loss of 11.1%.

One top performer includes financial firm Columbia Banking System (COLB), up 22% over the past 12 months.

InfraCap Small Cap Income ETF (SCAP) has a short history, but we like the fund's focus on quality.

It invests only in profitable firms that pay dividends and trade at reasonable prices relative to earnings growth.

Nearly 25% of the fund's assets are in preferred stocks, and that boosts the fund's yield to 7%. Over the past 12 months, the fund's 8.4% loss beat the 11.1% decline in the Russell 2000, and it did so with 13% less volatility.

Finally, for a spicier option, consider the Oberweis Micro-Cap (OBMCX). Stocks in this growth fund average $1.6 billion in market value, half the average market cap of firms in the Russell 2000.

Volatility is high, but so are the fund's returns. Over the past three, five and 10 years, the fund has outpaced 98% of all small-cap growth funds.

The managers favor firms that have significantly beaten analysts' earnings expectations and have a fundamental business reason to drive future growth. Top holding biotech firm ADMA Biologics (ADMA) has gained 188% over the past 12 months.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.