Small-cap ETFs in 2026 have done what they failed to do for most of the past decade: outperform large caps. The Vanguard Small-Cap ETF (VB) returned 18.24% at net asset value in the first half of 2026 against 10.19% for the Vanguard S&P 500 ETF (VOO), and the iShares Russell 2000 ETF (IWM) returned 40.59% over the twelve months to June 30, 2026 against 22.29% for the iShares Core S&P 500 ETF (IVV) [1][2][3][4]. Valuations still favor the smaller companies: IWM's price/earnings ratio was 19.13x and VB's 22.3x, compared with 27.5x for VOO [1][2][3].
Small-cap ETFs in 2026: performance versus large caps
| Period to June 30, 2026 (NAV) | IWM (Russell 2000) | VB (CRSP US Small Cap) | VOO (S&P 500) |
|---|---|---|---|
| Second quarter 2026 | n/a | 16.03% | 15.19% |
| Year to date | n/a | 18.24% | 10.19% |
| 1 year | 40.59% | 29.48% | 22.28% |
| 3 years (annualized) | 18.44% | 16.72% | 20.58% |
| 5 years (annualized) | 6.86% | 7.69% | 13.36% |
| 10 years (annualized) | 11.53% | 11.75% | 15.47% |
Data: iShares and Vanguard fact sheets as of June 30, 2026 [1][2][3].
The one-year numbers are exceptional. IWM's 40.59% return compares with calendar-year results of 12.69% for 2025, 11.35% for 2024, 16.80% for 2023 and a 20.48% loss in 2022 [1]. Yet the longer record still favors large caps: over five years IWM earned 6.86% a year and VB 7.69%, against 13.36% for VOO, and over ten years the gap is about four points a year [1][2][3]. The 2026 rally has closed part of a very large deficit, not all of it.
Why the valuation gap matters
On June 30, 2026, IWM's holdings traded at 19.13 times trailing earnings and 2.22 times book value, and VB's at 22.3 times earnings and 2.7 times book [1][2]. VOO's S&P 500 portfolio traded at 27.5 times earnings and 5.4 times book [3]. IVV, which uses an earnings calculation that excludes loss-making companies and caps individual ratios at 60, reported 30.17 times [4]. However measured, large caps carried a premium of roughly five to eleven points of earnings multiple over small caps at mid-year.
The premium is not irrational. VOO's return on equity was 29.0% and its earnings growth rate 23.0%, against 10.9% and 10.5% for VB [2][3]. Large companies are more profitable and growing faster, and a higher multiple is the market's price for that. The question for 2026 is whether the gap in quality justifies the gap in price when small caps are already delivering the stronger stock returns.
Two very different small-cap indexes
IWM and VB are not interchangeable. IWM tracks the Russell 2000, held 2,004 stocks, and its largest position was 0.38% of the fund; its top ten holdings summed to just 3.42% [1]. VB tracks the CRSP US Small Cap Index, held 1,311 stocks with a median market capitalization of $11.3 billion, and its top ten were 4.3% of assets [2]. VB reaches further up the size scale, which is why its five- and ten-year returns are slightly better and its three-year standard deviation of 17.26% is below IWM's 19.98% [1][2]. IWM's equity beta of 1.27 against the S&P 500 confirms that the Russell 2000 is the more volatile of the two [1].
Sector mixes differ too. IWM had 20.10% in health care, 18.33% in financials, 14.91% in industrials and 14.27% in information technology [1]. VB, using a different classification system, had 22.4% in industrials, 15.3% in technology, 12.8% in consumer discretionary and 12.3% each in financials and health care [2]. Both hold far less technology than the S&P 500, where the sector was 38.0% of VOO [3].
Costs and what they mean over time
VB charges 0.03%, the same as VOO, while IWM charges 0.19% [1][2][3]. Vanguard reports that the average small-cap core fund charged 1.07% and the average small-cap core ETF 0.36% as of December 31, 2025, so both funds are cheap for the category, but the 0.16 point difference between them adds up for a long-term holder [2]. IWM's advantage is its role as the standard Russell 2000 trading vehicle, with $82,970.35 million in net assets and 276,250,000 shares outstanding at June 30, 2026, compared with $81,537 million in ETF assets for VB [1][2].
How investors may use small-cap ETFs in 2026
- Diversification away from mega-caps: a small-cap allocation reduces exposure to the ten stocks that make up more than a third of the S&P 500.
- Valuation discipline: at 19x to 22x earnings, small caps offer a lower entry multiple than large caps at 27x to 30x, with lower profitability as the trade-off [1][2][3][4].
- Volatility budget: expect larger swings; IWM's beta of 1.27 and its 20.48% loss in 2022 show the downside [1].
- Fund choice: VB for the lowest cost and broader size range, IWM for pure Russell 2000 exposure and trading depth [1][2].
Small caps beat large caps by eight to eighteen percentage points over the year to June 30, 2026, and still trade at a lower earnings multiple, but their five- and ten-year records remain well behind the S&P 500.
Performance and holdings for IWM, VB and other small-cap funds can be compared on DataPorium's ETF page [5].
Key takeaways
- VB returned 18.24% in the first half of 2026 versus 10.19% for VOO; IWM returned 40.59% over one year versus 22.29% for IVV [1][2][3][4].
- Small caps traded at 19.13x (IWM) and 22.3x (VB) earnings against 27.5x for VOO on June 30, 2026 [1][2][3].
- Large caps are more profitable: VOO's return on equity was 29.0% versus 10.9% for VB [2][3].
- Over five and ten years large caps still lead by four to six points a year [1][2][3].
- VB costs 0.03% and IWM 0.19%; both are far below the 1.07% small-cap fund average [1][2].
Frequently asked questions
Are small-cap ETFs a good investment in 2026?
They have outperformed so far: VB returned 18.24% in the first half of 2026 against 10.19% for the S&P 500 fund VOO, and they trade at lower multiples [2][3]. They are also more volatile and less profitable, so investors may consider them as a portion of an equity allocation rather than a replacement for large caps.
What is the difference between IWM and VB?
IWM tracks the Russell 2000 with about 2,000 stocks and costs 0.19%; VB tracks the CRSP US Small Cap Index with about 1,300 somewhat larger stocks and costs 0.03% [1][2]. VB has been slightly less volatile and has returned a little more over five and ten years.
Are small caps cheaper than large caps right now?
Yes on earnings multiples: 19.13x for IWM and 22.3x for VB versus 27.5x for VOO as of June 30, 2026, although large caps earn a much higher return on equity [1][2][3].
How much did the Russell 2000 ETF return over the past year?
IWM returned 40.59% at NAV for the twelve months ended June 30, 2026, against 40.78% for the Russell 2000 Index [1].
Sources & References
- [1] iShares Russell 2000 ETF (IWM) Fact Sheet as of June 30, 2026
- [2] Vanguard Small-Cap ETF (VB) Fact Sheet as of June 30, 2026
- [3] Vanguard S&P 500 ETF (VOO) Fact Sheet as of June 30, 2026
- [4] iShares Core S&P 500 ETF (IVV) Fact Sheet as of June 30, 2026
- [5] DataPorium ETF Analytics: Holdings, Flows and Performance
