Small-cap index funds

What happened: Small-cap index funds, tracking U.S. stocks with market capitalizations below $8 billion, have shown varied performance in 2026. The Vanguard Small-Cap ETF (VB) and iShares Core S&P Small-Cap ETF (IJR) both underperformed broader market indices, with VB outperforming IJR in terms of fees and diversification. The iShares Russell 2000 ETF (IWM) delivered average annual returns of 8.06% over 26 years, potentially turning a $10,000 investment into $1 million in 60 years. Meanwhile, the Russell 2000 index entered correction territory, falling more than 10% off its recent high. The S&P/ASX Small Ordinaries Index closed at 3,315.40 on Friday, up 3.56% over five days but expected to pull back.

Market impact: Small-cap stocks, despite higher volatility, offer exposure to companies with growth potential. The Russell 2000's correction may signal a shift in investor sentiment towards smaller companies. The Vanguard Russell 2000 ETF (VTI) holds a broader range of U.S. stocks, including small-caps, but this diversification may also expose investors to sectors getting hit hardest. The iShares Russell 2000 Value ETF (IWN) and State Street SPDR S&P 600 Small Cap Value ETF (SLYV) both target small-cap value stocks, with IWN offering broader diversification and SLYV maintaining a lower expense ratio.

What to watch next: Investors should monitor the earnings reports of small-cap companies in the Russell 2000 index, with the next reporting season expected in late July to early August. Additionally, the geopolitical tensions in the Middle East could impact small-cap stocks, given their lesser exposure to these tensions. Lastly, the performance of the Russell 2000 index relative to broader market indices will provide insights into investor sentiment towards small-cap stocks.