Morningstar names ETFs to buy ahead of a small-cap rally
Morningstar thinks investors should overweight small-cap stocks relative to large-cap stocks today. / Photo: Unsplash/Jakub Żerdzicki
Morningstar has identified the six best ETFs to buy ahead of a small-cap “revival.” Morningstar contributor Susan Dziubinski says now is the best time to invest in the segment: Small caps remain the most undervalued part of the market, and although Fed easing and charged economic growth are not expected in the near term, small caps could start to pay off “later this year or [in] early 2026.”
Dimensional US Small Cap ETF. An actively managed fund targeting the smallest 10% of U.S. publicly traded companies.
Dimensional US Targeted Value ETF. An actively managed fund selecting stocks based on two main criteria: relative price and expected returns.
SPDR Portfolio S&P 600 Small Cap ETF. A passive fund tracking stocks from the S&P SmallCap 600. Like all index funds, it automatically buys and sells shares in proportion to their index weights.
Vanguard Small-Cap ETF. A passive fund tracking the CRSP US Small Cap Index. It includes value stocks, i.e., those backed by stable businesses but with lower upside than growth stocks.
Vanguard Small-Cap Growth ETF. A passive fund targeting companies from the CRSP US Small Cap Growth Index.
Vanguard Small-Cap Value ETF. A passive fund focused on stocks from the CRSP US Small Cap Value Index.
Morningstar’s rationale
Small caps are currently the most undervalued segment of the market: As of late April, they were trading at a 25% discount to their fair value, as estimated by Morningstar, says Dave Sekera, Morningstar’s chief U.S. market strategist. For comparison, large-cap stocks were just 8% undervalued.
Sekera expects small caps to “start to work” in late 2025 or early 2026. Last year, small caps rallied twice on expectations of Fed rate cuts and once following Trump's election victory. Historically, smaller companies perform best when the Fed is easing monetary policy and the economy is poised for a rebound, Sekera explains. He believes investors should not wait for a full bounceback in the segment — even a moderate rotation out of large-cap stocks could push small caps higher.
