There has been a visible disparity between the performance of U.S. small-caps and U.S. large-caps so far this year. What hasn’t been too visible is a lot of investor interest in the action.
When we plot the performance of the S&P 600 vs. the S&P 500 — as measured by the iShares S&P 600 ETF (IJR) and the iShares S&P 500 ETF (IVV) — we see a five-percentage-point difference, with IJR up about 12% year-to-date while IVV is up about 7%. In the past month, momentum has shifted in favor of large-caps. Still, small-caps continue to gain ground as the segment benefits from several key trends.
Why Small-Caps?
Many small-caps are beneficiaries of important investment themes, such as AI-driven energy needs and electrification as well as reshoring. Many of these industries are less sensitive to any kind of “Magnificent Seven” fatigue.
More broadly, these stocks are benefiting from a shifting market cycle, according to Matt Camuso, head of ETF solutions at Baron Capital. Baron Capital is a well-known growth active manager. While new to ETFs, he has a strong history of outperformance relative to benchmarks and peers. According to Camuso, a lot of that track record is thanks to its approach to the small- and midcap space.
Key traits like historically low valuations relative to large-caps and the long-term compounding potential of strong “owner-operated” companies define the opportunity in small- and midcap stocks right now.
“We are seeing valuations in the small- and mid-cap space that are as attractive as they’ve been in decades,” Camuso said in a recent conversation. “While the S&P 500 is trading at elevated multiples driven by a handful of names, the average stock — particularly in the SMID space — has been left behind, creating a massive rubberband effect for when the market eventually broadens.”
Demand Trends
Asset flows, however, have been mixed among small-cap ETFs. They suggest a certain level of skepticism about the rising tide in this category.
While IJR, for example, has picked up about $2.1 billion in net inflows year-to-date, the iShares Russell 2000 ETF (IWM) has bled more than $5.3 billion. Meanwhile, U.S. large-cap ETFs remain, for the most part, asset gathering leaders.
Other passive giants like the Vanguard Small-Cap Growth ETF (VBK), as another example, have faced outflows. VBK has bled nearly $500 million in 2026, despite posting performance gains of more than 11%. Meanwhile, the State Street SPDR Portfolio S&P 600 Small Cap ETF (SPSM) has gained about $455 million.
Active’s Value Prop Tested
One demand trend that stands out is the relatively strong appetite for active approaches that rely on fundamental or quantamental security selection in small-caps. These ETFs look to navigate issues, such as unprofitability and volatility, known to plague many small-cap names. (Consider that the Russell 2000 is known to have as many as 40% of its names be companies that are unprofitable.)
Active managers can be selective as they access the category. So far this year, investors are showing a willingness to pay active fees for a hands-on approach to small-caps. They are embracing the high-conviction takes on the opportunity set.
In the case of Baron Capital, for example, which manages the Baron SMID Cap ETF (BCSM), the fund’s active share is a whopping 96.3%, as of early May. The very high-conviction strategy, centered on growth, currently owns only about 50 stocks.
“We don’t own stocks; we own businesses,” Camuso said. “In the small-cap world, the difference between a winner and a loser is vast. You cannot just buy the index and expect to win because you’re buying a lot of junk.”
As he put it, the portfolio manager’s goal is to identify the company that will become “the next large-cap leader,” showing sustainable competitive advantages driven by solid management teams. It’s a boots-on-ground research-driven approach to identifying a narrow subset of small- and midcap growth opportunities.
Other active managers finding traction include firms like American Century with the Avantis lineup of ETFs, known for its focus on attractively valued quality names, as well as T. Rowe Price and Capital Group, among others.
Consider the data. The Avantis U.S. Small Cap Value ETF (AVUV) has seen more than $2.7 billion in net inflows in 2026. The Avantis U.S Small Cap Equity ETF (AVSC) has taken in $270 million in net new money this year. They are each up about 15% year-to-date.
The T. Rowe Price Small-Mid Cap ETF (TMSL), which considers quality and valuations in security selection, has seen more than $800 million in net inflows this year. (T.Rowe’s active approach has successfully led the company to a fast $25 billion in total ETF assets). The Capital Group U.S. Small and Mid Cap ETF (CGMM) is another example of an active approach resonating with investors. CGMM has picked up $1.2 billion in the same period.
Looking Ahead
As we look at the mixed demand data, we understand many investors continue to take a “wait-and-see” attitude towards the so-called generational opportunity in small-caps. There are many reasons for that: recency bias in favor of large-caps, skepticism about the outlook for small-caps in an environment of higher-for-longer rates, concerns about profitability, etc. Muted inflows or outright outflows persist across many strategies.
But we also see an embrace of active managers in this category, even across ETFs that are relatively new to the market, as many investors look to a hands-on approach.
We know that being a small-cap investor isn’t always easy. This segment of the market has been known to deliver explosive growth opportunities. However, it’s also known for being difficult to navigate, volatile, “junky” and sometimes home to many value traps. Successfully investing in small-caps in the long-term often requires a strong stomach, or as Camuso puts it, “legendary patience.”
Research is key. Due diligence is key. Conviction is a must. Active managers look to deliver just that.
To listen to entire conversation with Camuso, check out this link.
