As the Federal Reserve’s rate cuts become more likely to begin in September, investors may shift their focus back to U.S. small-cap ETFs. Many of these funds have been out of favor in 2025, as large-cap counterparts have captured significant investor attention. Smaller companies tend to rely more heavily on debt to fund their growth and often have businesses that are more dependent on domestic economic conditions.
Small-Cap ETFs Out of Favor
The small-cap ETFs with biggest asset bases track market-cap-weighted indexes. The iShares Core S&P SmallCap ETF (IJR), the Vanguard Small Cap ETF (VB), and the iShares Russell 2000 ETF (IWM) each recently managed more than $65 billion in assets. While IWM and IJR have a combined $13 billion of net outflows this year, VB has seen modest net inflows of $120 million.
Of the three, IWM has been the strongest performer, gaining 6.6% year-to-date through August 26. We will, however, set aside a detailed analysis of why IWM’s return was over 300 basis points stronger than IJR. For now my focus is on the factor-based small-cap ETFs that have performed even better this year.
Relatively Strong Despite Small Size
The Invesco S&P SmallCap Momentum ETF (XSMO) iss up 10.4% thus far in 2025. Momentum ETFs across many investment styles have been strong performers, as we recently noted. XSMO owns 120 companies with relative performance strength. The resulting portfolio is rather well-diversified. Financials (20% of assets), industrials (19%), consumer discretionary (18%), healthcare (13%), and information technology (13%) sectors are highly represented.
With a small-cap portfolio, many investors might not recognize the holdings. Armstrong World Industries (industrials), Brinker International (consumer discretionary), Concept Therapeutics (healthcare), InterDigital (information technology), and Mr. Cooper Group (financials) are among the largest recent positions. XSMO manages $1.8 billion in assets and has gathered just under $300 million this year.
A Forward-Looking Quality Approach Has Worked
The VictoryShares Small Cap Free Cash Flow ETF (SFLO) was up 8.8% in 2025 as of August 26. The high-quality, small-cap ETF launched at the end of 2023 and manages $325 million in assets. SFLO takes a forward-looking approach assessing quality and value through its free-cash-based methodology. Consumer discretionary (19% of assets), industrials (17%), healthcare (13%), and information technology (12%) are widely held in SFLO as well. However, rather than a focus on financials, SFLO’s heftiest stake was in energy (22%).
Chord Energy (energy), Civitas Resources (energy). Clear Secure (information technology), Jazz Pharmaceuticals (healthcare), and Symbiotic (industrials) are some of the the ETF’s largest positions. SFLO has gathered $120 million this year.
While investors should never choose a fund based solely on its performance record, it is important for those exploring the merits of small-cap ETFs to look beyond just the largest products. SFLO and XSMO are just two examples of the many alternatives available to consider.
VettaFi LLC (“VettaFi”) is the index provider for SFLO, for which it receives an index licensing fee. However, SFLO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of SFLO.
