Small-cap stocks have a reputation for being the market’s scrappy overachievers. They can be volatile and occasionally unruly, but they’re also often where the next generation of market leaders quietly begins.
“These companies are typically earlier in their growth cycle and may benefit from innovation, new market opportunities or economic expansion,” says Jason Bernat, president and CEO of American Financial Services in Boardman, Ohio. Historically, they’ve also demonstrated higher long-term growth potential thanks to the “size premium” where smaller companies can grow revenue and earnings faster than larger ones.
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“Think of a company that maybe serves a product and/or service in a local area,” says Chris Berkel, investment adviser and president of AXIS Financial in Edmond, Oklahoma. “If they expand nationwide, then the growth potential is huge.”
Compare this to a giant like Microsoft Corp. (ticker: MSFT) or Apple Inc. (AAPL), which already sell their products worldwide. “The next new customer is much harder to find for large businesses,” Berkel says.
But not all small-cap companies are destined for greatness. Many will never make it past their humble beginnings, while others will have a long and bumpy ride toward long-term growth. This is why small-cap exchange-traded funds, which can hold hundreds or even thousands of small-cap stocks, can be an investor’s best friend.
What to Know Before Investing in Small-Cap ETFs
Small-cap stocks can provide incredible long-term growth, but they aren’t without their drawbacks.
“Smaller companies tend to have less stable earnings, lower liquidity and a greater sensitivity to economic cycles,” Bernat says. “This means small-cap ETFs can experience larger price swings and deeper drawdowns during market downturns.”
The other potential downside is that if things do go well for a small-cap company, it will become a mid-cap company and then a large-cap. “So, as a small company grows up, it moves from one index to another, which means that you’re not always going to have the benefits of your small-cap stock growing up,” Berkel says.
There is also greater nuance in small-cap stocks, Berkel says, so it’s worth considering actively managed funds as a “great way to potentially unlock alpha within the space.” Just be sure to read the prospectus and investment strategy closely as there are a lot of different styles among managers.
Even among passively managed small-cap ETFs, funds “differ widely in their underlying indexes, sector exposures and growth versus value focus, which can significantly affect performance,” Bernat says. “Because of this volatility they are best used as a long-term growth allocation within a strongly diversified portfolio.”
With that in mind, here are seven quality small-cap ETFs worth considering for your portfolio:
| ETF | EXPENSE RATIO | 10-YEAR RETURN* |
| Vanguard Small-Cap Growth ETF (VBK) | 0.05% | 10.8% |
| iShares Russell 2000 ETF (IWM) | 0.19% | 10.0% |
| iShares MSCI EAFE Small-Cap ETF (SCZ) | 0.40% | 7.8% |
| Avantis International Small Cap Equity ETF (AVDS) | 0.30% | 35.5%** |
| Schwab Fundamental U.S. Small Company ETF (FNDA) | 0.25% | 10.1% |
| Vanguard S&P Small-Cap 600 Growth Index ETF (VIOG) | 0.10% | 10.1% |
| iShares Morningstar Small-Cap Growth ETF (ISCG) | 0.06% | 10.9% |
*Annualized, as of March 13.
**One-year return as of March 13.
Vanguard Small-Cap Growth ETF (VBK)
This list kicks off with one of the lowest-cost ways to capitalize on some of the fastest-growing small-cap companies in the U.S. “The Vanguard Small-Cap Growth ETF is one of the most widely used small-cap growth ETFs for inexperienced investors seeking long-term capital appreciation,” Bernat says.
VBK tracks the CRSP U.S. Small Cap Growth Index, which in turn tracks the performance of smaller companies with significant growth stock characteristics. This means you get “exposure to hundreds of small companies with strong earnings and revenue growth potential,” Bernat says. And with an expense ratio of only 0.05%, you’ll be hard-pressed to find a cheaper fund that does this.
The portfolio is well diversified over roughly 550 companies, none of which represent more than 1.4% of the whole shebang. “The ETF also leans toward innovative sectors such as technology and health care, which historically have been major drivers of growth among smaller companies,” Bernat says.
It’s the second-best fund on the U.S. News & World Report Small Growth ranking. (Spoiler alert: The No. 1 fund on that list is coming up.) So, you should be in good, low-cost hands here.
iShares Russell 2000 ETF (IWM)
For pure-play small-cap exposure, Berkel points to funds like IWM, which provide “broad strokes” on the investment canvas. As the name suggests, the fund tracks the Russell 2000 index, which tracks approximately 1,953 of the smallest companies in the Russell 3000 index. This means you get very broad exposure to the U.S. small-cap universe.
At nearly $70 billion in assets, this is also one of the largest small-cap ETFs on the market. It’s also incredibly liquid with roughly 35 million shares trading hands each day, on average. So you won’t need to worry about finding a counterparty to your trade or large bid-ask spreads here.
If you want an even more growth-oriented take on the Russell 2000, iShares also provides a Russell 2000 Growth ETF (IWO). It tracks the Russell 2000 Growth Index, but has only marginally better performance over the past 10 years, has a 0.05-percentage-point higher expense ratio and is smaller with less liquidity than IWM.
iShares MSCI EAFE Small-Cap ETF (SCZ)
Small companies don’t exist only in the U.S. Depending on the global economic environment — such as when the U.S. dollar weakens or if the U.S. economy falls into recession — foreign small caps may outperform U.S. small caps. For example, over the past year, SCZ returned 25.7% compared to just 22.4% from VBK. So, as with all aspects of your portfolio, diversification can be a smart move here.
With a 0.4% expense ratio, $13.7 billion in assets under management and an average daily trading volume north of 1 million shares, SCZ is one of the most liquid and low-cost international small-cap ETFs on offer. You’ll get exposure to small companies across Europe, Australia, Asia and more.
The portfolio includes over 2,000 companies, none of which represent more than 0.4% of the total pie. As a result, only 3% of the fund’s assets are in the top 10 names.
Avantis International Small Cap Equity ETF (AVDS)
AVDS is another example of how strong international markets have been the past year — and why active management may be appropriate, especially in international small-cap markets. The fund returned about 35.5% over the past year.
This is a newer fund, however, having only launched in July 2023. So, it hasn’t been tested in as many markets as the others on this list. It’s also much smaller, at around $243 million, with roughly 35,000 shares trading hands on average each day.
AVDS loosely tracks the MSCI World ex-U.S. Small Cap Index, but reserves the right to deviate based on current prices. In other words, it strives to combine the best of both passive and active management with a reasonable expense ratio but flexible stock selection.
The portfolio has over 3,000 names and does a great job of spreading its holding evenly across them all. The largest holding is only 0.38% of assets. This results in less than 3% of the portfolio being in the top 10 names. You’ll also get exposure to every sector and 29 individual countries. Japan represents the largest portion of the portfolio at nearly one-third of assets.
Schwab Fundamental U.S. Small Company ETF (FNDA)
FNDA takes a fundamentals?first approach to small?cap investing, favoring companies with stronger sales, cash flow and dividends rather than just chasing the flashiest growth stories or basing investment decisions on company size. That rules?based screen gives the portfolio a subtle value tilt, but the end result is still a broad, growth?compatible mix of smaller companies with real financial strength behind them.
With nearly 900 holdings and a low expense ratio, FNDA offers a practical way to pursue small?cap upside while avoiding some of the more speculative corners of the market. It covers every sector, and no single company represents more than 1.1% of the portfolio. As a result, the top 10 names account for only 5% of total assets. So if you want long-term growth potential without leaning entirely on high-volatility names, give this one a look.
Vanguard S&P Small-Cap 600 Growth Index ETF (VIOG)
Vanguard does it again with another top-ranked small-cap growth fund. This one comes in No. 8 on U.S. News’ list. It tracks the S&P 600, which is like the S&P 500’s smaller-company cousin. While the S&P 500 tracks 500 of the largest U.S. companies, the S&P 600 tracks 600 small-cap companies. To qualify, these firms must be profitable.
VIOG’s portfolio includes only 337 of those 600 companies, but is nicely spread across them all. The largest holding gets only 1.23% of the fund’s assets, and only 11% of all assets are in the top 10 holdings. You’ll also get a bit of each sector with VIOG.
The fund returned 11.6% over the past three years and 19.3% over the past one year, all with a very reasonable cost of 0.1%. One thing to watch here is that VIOG tends to be more thinly traded, with just about 20,000 shares trading hands each day.
iShares Morningstar Small-Cap Growth ETF (ISCG)
Finally, the moment you may have been waiting for: the aforementioned No. 1 ETF on U.S. News’ small growth list.
ISCG tracks the Morningstar US Small Cap Broad Growth Extended Index, which uses 10 factors to select stocks considered small cap by Morningstar. The fund holds 961 stocks, all of which are 1.67% or less of the total portfolio. So only 7% of the fund’s assets are in the top 10 names. They also cover every sector.
Its 0.06% expense ratio should warm any long-term investor’s heart. And the 10.9% 10-year return is not too shabby.
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7 Best Small-Cap ETFs to Buy for Growth originally appeared on usnews.com
Update 03/16/26: This story was published at an earlier date and has been updated with new information.