Small-cap ETFs in 1Q26: Who managed to gain from the energy shock?

The escalating conflict in the Middle East has triggered the largest disruption to oil supplies in the history of the global market. Against that backdrop, oil prices have remained near $100 per barrel, while the energy sector in the S&P 500 gained about 38% in the first quarter even as the broader index fell 4.6%.

The divergence reflects a major market rotation: investors are exiting expensive growth stocks, particularly tech names, and reallocating capital into value sectors such as energy, industrials, and financials. Small-cap stocks have also outperformed, especially in the value segment. The Russell 2000 Value rose about 5% in the quarter, while the Russell 2000 Growth fell 2.8%. That marked the third consecutive quarter in which value stocks outperformed growth stocks in the small-cap universe.

Among 38 small-cap ETFs tracked by Oninvest (see the table below), the top performer was First Trust Small Cap Value AlphaDEX ETF (FYT), which gained 8.6% in the quarter. The fund uses the AlphaDEX methodology to select the most attractive value stocks from the NASDAQ US 700 Small Cap Index and applies an equal-weighted approach. A high allocation to the energy sector (about 18.7%) and financials (19.8%) largely explains the fund’s outperformance amid rising oil prices and the rotation into value stocks.

The second-best performer was Avantis U.S. Small Cap Value ETF (AVUV), which returned 7.4%. It is one of the largest funds in the segment, attracting about $4.97 billion in inflows over the last year. The strategy is actively managed with a focus on value and profitability. According to Avantis data, the fund’s net asset value return reached 8.55% year to date as of March 31. The portfolio also has significant exposure to energy (about 19%) and financials (26%), which helped drive its outperformance during the quarter.

Other top performers included Dimensional US Small Cap Value ETF (DFSV), which gained 5.83%, and Avantis U.S. Small Cap Core ETF (AVSC), up 5.79%. Both funds focus on fundamentally strong small-cap companies trading at low valuation multiples.

Against that backdrop, major benchmarks came under pressure. The S&P 500 fell 4.7% in the first quarter, Germany’s DAX lost 7.6%, Hong Kong’s Hang Seng Index declined 5.9%, and MSCI World – tracked by the iShares MSCI World ETF – lost 3.48%. At the same time, broad small-cap ETFs such as iShares Russell 2000 ETF (minus 0.14%) and Vanguard Russell 2000 ETF ( minus 0.11%) proved relatively resilient, remaining largely unchanged despite the decline in global equity indexes.

Global small-cap ETFs, which delivered returns of 30-40% in 2025, slowed in the first quarter of 2026 but still managed to remain in positive territory. The top performer was Avantis International Small Cap Value ETF with a return of 5.45%, followed by Dimensional International Small Cap Value ETF, which gained 2.94%, and Invesco FTSE RAFI Developed Markets ex-U.S. Small-Mid ETF, up 2.84%.

Global funds were also supported by the iShares MSCI ACWI ex U.S. ETF (ACWX), which finished the quarter modestly higher at about 0.5%, even as major U.S. and European indexes declined. Despite the energy shock, which hit Asian and European economies harder, international small-cap companies managed to stay in positive territory: their cyclical structure and higher exposure to commodity-linked sectors partly offset rising costs.

Among emerging-market funds, WisdomTree Emerging Markets SmallCap Dividend ETF (DGS) stood out with a gain of 4.52%, benefiting from its focus on dividend-paying companies in commodity-driven economies.

For value-oriented small-cap funds such as First Trust Small Cap Value AlphaDEX ETF and Avantis U.S. Small Cap Value ETF, the market rotation became an additional catalyst. Their portfolios are concentrated in energy, financials, and industrials – sectors that tend to benefit first from rising commodity prices and stronger credit demand. The valuation gap between value and growth stocks remains significant, which could support a further rotation into value, especially if the conflict in the Middle East becomes prolonged, Morningstar Wealth chief strategist Dominic Pappalardo says.

The largest holding in the First Trust Small Cap Value AlphaDEX ETF portfolio is Kosmos Energy with a weighting of about 1.44%. The deepwater producer has assets in Ghana, Equatorial Guinea, and the Gulf of Mexico. The company’s stock rallied alongside oil prices, while production at the key Jubilee field in Ghana exceeded 70,000 barrels per day following the launch of new wells – a record level for the company.

At the same time, eight of the fund’s 10 largest holdings, with weightings ranging from 1.14% to 0.88%, are tied to the energy sector. They include offshore drilling operator Valaris, refiner Par Pacific Holdings, Permian Basin producer SM Energy, oil and gas company Crescent Energy, oilfield services provider Liberty Energy, and tanker operator International Seaways, which has benefited from longer oil shipping routes bypassing the Strait of Hormuz.

The Avantis U.S. Small Cap Value ETF portfolio holds about 775 stocks, and its overweight exposure to financials (25%), consumer stocks (18%), and energy (20%) explains its outperformance versus the broader Russell 2000 – those sectors rallied amid the oil-driven market rotation out of technology stocks.

The third-best performer, Dimensional US Small Cap Value ETF (DFSV), is an actively managed fund with more than 1,000 holdings and a regularly updated portfolio structure. At the start of 2026, its largest position was Alcoa Corporation (0.87% of assets), one of the world’s leading aluminum producers. Amid supply disruptions from the Middle East, aluminum inventories tightened: stocks at the London Metal Exchange fell below 400,000 metric tons, while prices climbed above $3,557 per metric ton – near four-year highs. That supported the company’s results: first-quarter profit rose to $425 million versus $213 million in the previous quarter, while the stock has gained almost 27% year to date.

Notably, by April the fund’s largest holding had become oil producer APA Corporation, whose stock rose about 54% year to date. The shift highlights how geopolitics has reshaped the drivers of performance within the value segment.

In the first quarter, small-cap companies traded at historically low EV/EBIT multiples relative to large-cap peers, while forecasts for 2026 point to faster earnings growth, according to a report from Royce Investment Partners.

LSEG consensus data projects first-quarter earnings growth for Russell 2000 companies at about 44.9% year over year – the highest level since mid-2025.

For investors focused on small caps, the key question is whether support from the oil shock and the rotation into value stocks will persist. If the conflict in the Middle East drags on and oil remains above $90 per barrel, value funds with heavy energy exposure will likely continue outperforming the broader market. In the event of de-escalation and a return in oil prices to pre-crisis levels, leadership could shift back to growth stocks.

At the same time, the valuation discount of small caps relative to large-cap stocks remains one of the main arguments in favor of the segment.

This material does not constitute individualized investment advice.