The S&P 500 is still regarded as the ultimate yardstick for investors, a benchmark that Warren Buffett has long encouraged retail investors to adopt through low‑cost index funds tracking the index. However, in 2026 an unexpected exchange‑traded fund has begun to outperform this flagship gauge.
The iShares Russell 2000 ETF (IWM), which mirrors the Russell 2000 small‑cap index, posted a year‑to‑date gain of 6.8% while the S&P 500 slipped a mere 0.1% over the same period. Over the full twelve‑month horizon, the Russell 2000 ETF has accumulated a 17.6% return, surpassing the S&P 500’s 14.9% gain.
This outperformance is achieved without the heavy concentration on megacap technology and consumer stocks that dominate the S&P 500—namely Nvidia, Alphabet, Microsoft and Amazon. Instead, the Russell 2000 ETF captures the upside of smaller, domestically‑oriented companies that have historically been overlooked.
The historical drag on small caps
Since the onset of the pandemic in 2020, small‑cap equities have lagged the broader market. J. P. Morgan Asset Management notes that these firms typically carry debt levels roughly 1.5 times higher than their large‑cap counterparts, rendering them more vulnerable to economic shocks. The combination of pandemic‑related disruptions, rising inflation and the Federal Reserve’s aggressive tightening cycle amplified their sensitivity. At the peak of rate hikes, borrowing costs for floating‑rate debt surged, squeezing margins for small businesses that lack the pricing power of larger rivals. Consequently, the Russell 2000 Index posted an average annual return of just 2.2% from 2020 through 2024, compared with the S&P 500’s 15.1% average. By the end of 2024, small‑cap valuations had slipped to a 20% discount relative to large‑cap peers.
Rate relief sparks a rebound
The turning point arrived in 2025 when inflation moderated and the Federal Reserve executed three successive rate cuts, lowering the target range to 3.50%–3.75%. Cheaper financing breathed new life into small‑cap earnings; T. Rowe Price reports a 12% earnings surge in the latter half of 2025, the first outperformance relative to large caps since 2021. From an April trough, the Russell 2000 rallied into January 2026, with profitability improvements evident in sectors such as industrials and financials.
Although the central bank appears cautious about accelerating cuts at its next policy meeting, many economists project two to three additional reductions later in the year, potentially dragging rates down to the 2.75%–3.00% corridor. Such easing would further alleviate debt service pressures and could amplify gains for domestically‑focused small‑cap firms riding the domestic recovery.
Structure and cost efficiency of the iShares Russell 2000 ETF
The iShares Russell 2000 ETF tracks a market‑cap‑weighted basket of roughly 2,000 U.S. small‑cap stocks spanning a market‑value range from roughly $8 million to $39 billion. Sector allocations include industrials (≈19%), financials (≈17%) and health care (≈17%). Notable holdings such as Bloom Energy and Credo Technology Group each command less than 1% of net assets, ensuring a broad‑based exposure without concentration risk.
With approximately $76.2 billion in assets under management, the fund offers ample liquidity—average daily turnover exceeding 30 million shares. Its expense ratio of 0.19% keeps operational costs low, while quarterly rebalancing maintains alignment with the underlying index. These characteristics make the ETF an accessible vehicle for investors seeking exposure to the resurging small‑cap segment without the overhead of active management.
Key takeaway
Historically, small caps have delivered a 2%–3% annual premium over large caps over the long run, barring periods of extreme interest‑rate stress that hinder debt‑financed growth. In 2026, the confluence of easing monetary policy, improving earnings momentum and attractive valuations appears to be resetting the playing field in favor of small‑cap equities. The iShares Russell 2000 ETF provides a straightforward, low‑cost means to capture this shift, offering an alternative to the simplistic “buy the market” approach that has dominated investment narratives in recent years.