The Russell 2000 Is Outpacing the S&P 500 in 2026. Is It Too Late to Buy Small-Cap ETFs?
After spending much of the past several years trailing large-cap stocks, U.S. small caps have staged an impressive comeback in 2026. The Russell 2000 has outpaced the S&P 500 year-to-date, up approximately 20%, prompting many investors to wonder whether they have already missed the opportunity.
However, despite the recent strong performance, the valuation gap between small- and large-caps remains. For investors who believe the small-cap rally is set to continue, the Vanguard Small-Cap ETF (VB) and the SPDR Portfolio S&P 600 Small Cap ETF (SPSM) offer two distinct, low-cost ways to gain exposure to the ongoing trend.
Why Small Caps are Rallying
While artificial intelligence continues to drive many large-cap technology stocks higher, investors have increasingly looked for ways to reduce concentration risk by broadening their exposure beyond just a handful of mega-cap growth stocks. After years of lagging the broader market, small-cap stocks continue to trade at a meaningful valuation discount to their large-cap counterparts, making them an attractive holding for investors seeking more reasonably valued opportunities.
Rather than signaling a shift away from AI, the recent rally reflects a broadening of market participation. Although the valuation gap has narrowed in recent months, small-cap stocks continue to trade at a discount, suggesting that there may still be room to run if investors continue to rotate into more attractively valued segments of the market.
Vanguard Small-Cap ETF (VB)
For investors seeking broad exposure to the U.S. small-cap market, the Vanguard Small-Cap ETF is a compelling option.
The fund tracks the CRSP U.S. Small Cap Index, providing exposure to more than 1,300 companies across a wide range of industries. Top holdings include names such as Credo Technology Group, Jabil Inc (JBL), and Revolution Medicines, Inc (RVMD).
The fund’s broad diversification and ultra-low expense ratio of 0.05% make it an attractive core holding for long-term investors.
When compared to the S&P 500, the fund’s current Sharpe and Sortino ratios of 1.42 and 2.09 indicate that investors have been well compensated for the additional risk traditionally associated with investing in small-cap stocks. In addition to strong recent performance, valuation metrics also appear favorable, with a price-to-earnings multiple of 17.43x and price-to-book multiple of 2.43x. By comparison, the SPDR S&P 500 ETF (SPY) currently trades at a price-to-earnings of 20.95x and price-to-book of 4.56x.
SPDR Portfolio S&P 600 Small Cap ETF (SPSM)
For investors looking for a more selective, quality-focused approach, the SPDR Portfolio S&P Small Cap ETF offers a compelling alternative.
Rather than tracking the entire small-cap universe, which includes many unprofitable companies, the S&P 600 index requires that companies meet certain profitability requirements to be included in the index.
As a result, SPSM offers exposure to approximately 600 higher-quality small-cap companies. With a tremendously low expense ratio of 0.03%, the fund is perfect for investors who want small-cap exposure but prefer an emphasis on financially stronger businesses. Top holdings include names such as Viasat, Inc (VSAT), Molina Healthcare (MOH), and Argan, Inc (AGX).
SPSM has delivered even stronger risk-adjusted performance than VB, with current Sharpe and Sortino ratios of 1.66 and 2.80. Based on its focus on quality, price-to-earnings of 15.73x and price-to-book of 1.94x also appear even more favorable than VB.
Head-to-Head: VB vs. SPSM
Although both funds are positioned to benefit if the small-cap rally continues, their investment strategies differ.
While VB prioritizes broader market representation, SPSM emphasizes quality through its profitability requirements, giving investors two different approaches to gaining exposure to the U.S. small-cap space.
| Feature | VB | SPSM |
| Index | CRSP US Small Cap | S&P SmallCap 600 |
| Holdings | ~1,300 | ~600 |
| Expense Ratio | 0.05% | 0.03% |
| Profitability Screen | No | Yes |
| P/E | 17.43x | 15.73x |
| P/B | 2.43x | 1.94x |
| Best For | Broad market exposure | Quality-focused exposure |
Final Verdict
Small-cap stocks have already delivered impressive gains in 2026, and the combination of continued market participation and valuation discounts suggests that the opportunity may not be over.
Rather than trying to perfectly time the next move, long-term investors may be best served by choosing an ETF that aligns with their individual investment approach. Whether through broad diversification with funds like VB, or the quality-focused methodology with funds like SPSM, both offer compelling, low-cost ways to gain exposure to the U.S. small-cap market.
Contact [email protected] for any questions or corrections.
