Small-cap stocks have quietly been outperforming the S&P 500 through early 2026, a rotation that many investors who stayed concentrated in large-cap technology missed entirely. At the same time, the Russell 2000 has been climbing while the narrative around mega-cap dominance has begun to fracture, and the funds positioned to capture that shift are not the ones most investors think of first.
Three small-cap ETFs are doing something worth paying attention to as they beat the S&P 500 year-to-date: the Invesco S&P SmallCap Momentum ETF (NYSE:XSMO), the Schwab Fundamental US Small Company ETF (NYSE:FNDA | FNDA Price Prediction), and the State Street SPDR Portfolio S&P 600 Small Cap ETF (NYSE:SPSM), none of which are household names
Three Funds, Three Different Edges
The Invesco S&P SmallCap Momentum ETF has returned 18.30% year to date and 44.37% over the past year, the strongest performance of the group. It holds just 116 stocks selected from the S&P SmallCap 600 based on price momentum, meaning the fund systematically buys what has already been working and rebalances to stay current.
The expense ratio is 0.36% for a portfolio that focuses heavily on holdings like VIAV, Primoris Services Corporation, and Visat. The bulk of the fund leans into industrials at 18%, technology at 18%, and healthcare at around 15%. The beta of 1.19 reflects the higher volatility that comes with momentum-driven concentration. This is a fund that accelerates in trending markets and gives back more in reversals.
The Schwab Fundamental US Small Company ETF has returned 11.90% year to date and 40.58% over the past year. It holds approximately 940 stocks selected and weighted not by market cap, but by fundamental measures including revenue, cash flow, dividends, and buybacks. The expense ratio is 0.25%, while its holdings focus heavily on exposure around industrials, financial services, technology, and consumer cyclical, all of which carry equal weight.
Top holdings include Lumentum Holdings, EchoStar Corporation, and Tronox Holdings, and its fundamental weighting methodology tends to favor companies with strong underlying business metrics over those whose prices have simply been bid up, which gives it a value tilt relative to the Invesco S&P SmallCap Momentum ETF.
The State Street SPDR Portfolio S&P 600 Small Cap ETF has returned 11.66% year to date and around 41.03% over the past 12 months. It holds 611 stocks tracking the S&P 600 index, which applies profitability screens that the Russell 2000 does not, filtering out many of the money-losing small caps that weigh on broader small-cap indexes.
The expense ratio is 0.03%, the lowest of the group by a significant margin, while financial services lead at 16%, followed by industrials and technology. With $13.87 billion in assets and an average daily volume of nearly 2 million shares, it is also by far the most liquid of the three.
How They Held Up in the Most Recent Selloff
During the sharp market pullback in early 2025, the Invesco S&P SmallCap Momentum ETF declined the most of the three funds, while the Schwab Fundamental US Small Company ETF held somewhat steadier due to its value orientation and diversification across 940 names.
The State Street SPDR Portfolio S&P 600 Small Cap ETF landed between the two, benefiting from the S&P 600’s profitability screens, which kept the worst-quality small caps out of the portfolio during a period when investors were quickly shedding risk.
The Liquidity and Volatility Tradeoff
Small-cap funds carry wider bid-ask spreads and greater price volatility than large-cap funds. The Invesco S&P SmallCap Momentum ETF, with only 116 holdings and $2.28 billion in assets, can move sharply on light news.
The Schwab Fundamental US Small Company ETF and the State Street SPDR Portfolio S&P 600 Small Cap ETF both offer more stability through deeper diversification and, in the case of the State Street fund, substantially higher trading volume. Investors using limit orders rather than market orders will manage entry and exit costs better across all three.
Suggested Allocation Ranges
For most diversified portfolios, a combined small-cap allocation of 10% to 20% of equity exposure is reasonable. Within that, the State Street ETF works best as the core position given its cost, liquidity, and quality screen. The Schwab ETF complements it with a value and fundamental tilt. The Invesco ETF is better suited as a modestly sized tactical satellite for investors who want to lean into the current market environment without betting the portfolio on it continuing indefinitely.
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