The Small-Cap ETFs Comeback: Is Now the Time to Invest?

In recent years, small-cap ETFs have struggled amid rising interest rates, as central banks sought to combat post-COVID inflation. These funds, which focus on smaller companies, tend to be more sensitive to higher borrowing costs.

However, a shift may be on the horizon. With the U.S. Federal Reserve and other central banks starting to ease rates, the economic environment could become more favorable for smaller businesses—potentially making small-cap ETFs more appealing to investors once again.

Investor Interest in Small-Cap ETFs Soars

According to Trackinsight data, there's been a big jump in interest for small-cap ETFs this year, with $13.53 billion flowing in this past month alone, and $20.02 billion so far this year. U.S. small-cap ETFs are leading the way, pulling in $11.44 billion in just a month, followed closely by small-cap stocks from developed markets, which brought in $10.72 billion.

So why the rising interest in small cap funds?

Why Small-Cap Stocks Tend to Shine When Interest Rates Drop

Small-cap stocks are particularly attractive in low-interest rate environments for several reasons.

Lower Borrowing Costs for Growth

First, lower borrowing costs allow these companies, which often depend on external financing for growth, to invest more in expansion and innovation without the burden of high interest payments. This can lead to improved profitability and higher stock valuations.

Sensitivity to Interest Rates

Additionally, small caps are generally more sensitive to interest rates than large caps; they typically hold more floating-rate debt and have weaker balance sheets, making them more vulnerable to rising costs of capital.

Agility and Adaptability

Moreover, smaller companies tend to be more agile and adaptable than their larger counterparts. Their size allows for quicker decision-making processes and a greater ability to pivot in response to market changes or emerging trends.

This agility enables small caps to seize new opportunities and innovate rapidly, which can drive growth and enhance competitive advantages. As interest rates decline, investor risk appetite tends to increase, leading to greater flows into small-cap stocks as they become more appealing compared to larger, more established companies.

Overall, the combination of lower financing costs, enhanced growth potential, and agility positions small caps favorably when rates are low.

Finding the Best Small Cap ETFs for your Portfolio

If you're looking to add small-cap ETFs to your portfolio, Trackinsight's global ETF screener and comparison tools are invaluable resources. These tools enable you to quickly filter, find, and compare a vast array of small-cap ETFs (or any other type).

According to the screener, there are currently 260 ETFs offering small-cap exposure.

Here is a list of options to consider if you're a US-based investor:

Top 5 largest small cap ETFs by assets under management (As of Sep. 26, 2024)

• iShares Core S&P Small-Cap ETF (IJR): $84.64B
• iShares Russell 2000 ETF (IWM): $68.73B
• Vanguard Small Cap ETF (VB): $59.81B
• Vanguard Small-Cap Value ETF (VBR): $30.31B
• Vanguard Small-Cap Growth ETF (VBK): $17.84B

Full IJR vs IWM vs VB vs VBR vs VBK comparison

Top 5 cheapest small cap ETFs by expense ratio

• SPDR Portfolio S&P 600 Small Cap ETF (SPSM): 0.03%
• BNY Mellon US Small Cap Core Equity ETF (BKSE): 0.04%
• Schwab U.S. Small-Cap ETF (SCHA): 0.04%
• iShares Morningstar Small-Cap ETF (ISCB): 0.04%
• Vanguard Small Cap ETF (VB): 0.05%

Full SPSM vs BKSE vs SCHA vs ISCB vs VB comparison

Top 5 small cap ETFs by net inflows year-to-date (As of Sep. 26, 2024)

• Vanguard Small Cap ETF (VB): +$4.00B
• Avantis U.S. Small Cap Value ETF (AVUV): +$3.91B
• iShares Core S&P Small-Cap ETF (IJR): +$2.92B
• Pacer US Small Cap Cash Cows 100 ETF (CALF): +$2.83B
• Vanguard Russell 2000 ETF (VTWO): +$2.81B

Full VB vs AVUV vs IJR vs CALF vs VTWO comparison

List of all US-listed small cap ETFs

Here is a list of options to consider if you're a European investor:

Top 5 largest small cap ETFs by assets under management (As of Sep. 26, 2024)

• iShares MSCI World Small Cap UCITS ETF (C) – USD (WLDS): $4.25B
• SPDR Russell 2000 US Small Cap UCITS ETF – USD (R2US): $3.29B
• Xtrackers MSCI Europe Small Cap UCITS ETF 1C – USD (XXSC): $2.00B
• iShares S&P SmallCap 600 UCITS ETF – USD (IDP6): $2.00B
• iShares MSCI USA Small Cap ESG Enhanced UCITS ETF – USD (CSUSS): $1.74B

Top 5 cheapest small cap ETFs by expense ratio

• JPMorgan ETFs (Ireland) ICAV - BetaBuilders US Small Cap Equity UCITS ETF (Dist) – USD (BBSD): 0.14%
• Invesco S&P SmallCap 600 UCITS ETF - Acc – USD (USML): 0.14%
• JPMorgan ETFs (Ireland) ICAV - BetaBuilders US Small Cap Equity UCITS ETF (Acc) – USD (BBSC): 0.14%
• iShares STOXX Europe Small 200 UCITS ETF (DE) – EUR (EXSE) : 0.2%
• UBS ETF MSCI USA Small Cap ESG Leaders UCITS ETF – USD (USSMC): 0.2%

Top 5 small cap ETFs by net inflows year-to-date (As of Sep. 26, 2024)

• Xtrackers MSCI Europe Small Cap UCITS ETF 1C – USD (XXSC): +$802M
• SPDR Russell 2000 US Small Cap UCITS ETF – USD (R2US): +$669M
• iShares STOXX Europe Small 200 UCITS ETF (DE) – EUR (EXSE): +$423M
• iShares MSCI World Small Cap UCITS ETF (C) – USD (WLDS): +$414M
• iShares S&P SmallCap 600 UCITS ETF – USD (IDP6): +$367M

List of all UCITS small cap ETFs

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.