Key Points

Analyses indicate that small-cap equities have seen notable earnings increases and may be undervalued versus their historical norms.
The iShares Russell 2000 ETF has generated 26 years of 8.6% annualized returns.
This iShares small-cap fund has beaten the tech-heavy Nasdaq-100 index over the past year.

Market conversations in recent years have centered on large companies such as the Magnificent Seven and trillion-dollar tech firms driving the artificial intelligence boom. Yet some of the strongest future prospects for investors could emerge from much smaller firms.

Thus far in 2026, small-cap stocks are ahead of the S&P 500 index. The iShares Russell 2000 ETF, a broad index fund tracking U.S. small-cap stocks, has climbed roughly 18% year to date and surpassed the S&P 500. Over the past year, the iShares Russell 2000 ETF posted total returns of 42.46%, ahead of both the S&P 500 and the tech-focused Nasdaq-100 index.

Is the recent advance in small-cap prices temporary, or might the rally persist? Fresh studies from T. Rowe Price and Fidelity provide useful perspectives on the forces behind robust returns in U.S. small-cap stocks and why the trend may endure.

Here are several factors suggesting small-cap stocks and the iShares Russell 2000 ETF could represent an attractive opportunity.

Small-cap stocks: stronger earnings growth since late 2025

T. Rowe Price research from February notes that U.S. small-cap earnings, measured by trailing 12-month earnings per share of the S&P 600 index, improved markedly in the final months of 2025. Between Sept. 19, 2025, and Jan. 27, 2026, small-cap earnings rose 27%.

The T. Rowe Price study states there is now clear evidence that U.S. small-cap stocks are undergoing a renaissance. The research anticipates further gains from favorable economic conditions, including lower tariff uncertainty, improved conditions for regional banks, and fiscal stimulus tied to recent U.S. tax policy shifts.

Fidelity research: Small-caps may be notably undervalued

Attractive valuations offer another reason to consider small-cap stocks. The iShares Russell 2000 ETF carries a price-to-earnings ratio just under 20 at recent levels, well below the S&P 500 and cheaper once the heavy influence of tech giants on that index is considered. The Russell 2000 ETF trades at about a 12% discount to the Invesco S&P 500 Equal Weight ETF, whose 22.7 earnings multiple reflects a more balanced weighting across its holdings.

Fidelity research from March 2026 shows small-cap stocks comprise roughly 4% of total U.S. market capitalization, well below their long-term average of 9%. Simple arithmetic suggests that if small-caps recovered half that gap to reach a 6.5% weighting, the move could imply around a 62.5% future lift in small-cap valuations.

Fidelity also cited several bullish factors for small-cap stocks, including the possibility of lower interest rates, increased mergers and acquisitions activity, and prospects for a healthy overall U.S. economy. The research concludes that valuation trends have improved the historical odds for U.S. small-cap outperformance, particularly over the next five to 10 years.

How to buy small-cap stocks: iShares Russell 2000 ETF

The iShares Russell 2000 ETF is a diversified index fund holding 1,906 U.S. small-cap stocks. It carries an expense ratio of 0.19%. Launched in May 2000, the fund has produced average annual returns of 8.6% over the past 26 years, modestly below the long-term S&P 500 average of 10%.

Why consider the iShares Russell 2000 ETF now? If the latest findings from T. Rowe Price and Fidelity hold, small-cap stocks may be entering a sustained resurgence. These companies appear to be improving profitability, and many look undervalued relative to other market segments.

This iShares fund provides exposure across a broad range of sectors beyond major tech names and the AI theme. The top five sectors represented are:

Industrials: 19.4% of the fund
Information technology: 18.6%
Healthcare: 16.5%
Financials: 16.02%
Consumer discretionary: 7.87%

For investors seeking a broad selection of smaller, emerging companies with solid growth potential that many others have overlooked, the iShares Russell 2000 ETF offers an effective route. These attributes help explain why the fund ranks among top small-cap ETFs.