The small-cap rally stalled in the 3Q. Which ETFs stayed above water for 9m26?

U.S. small caps retained a narrow lead over large caps in the first nine months of the year. The Russell 2000 gained 13.7% in the period, versus 12.3% for the Russell 1000, which tracks large U.S. companies. Almost all that outperformance, however, came in the first half: in the third quarter, the Russell 2000 lost 7.2%, while the Russell 1000 added 1.8%.

The reversal coincided with tightening monetary policy: on September 16, the Fed raised interest rates for the first time since 2023, lifting its target range 25 basis points to 3.75-4.00%. According to Russell Investments, the 10-year Treasury yield rose 0.85 percentage points in the quarter to 5.29%, its highest level since 2002. Meanwhile, oil climbed back above $100 per barrel. That combination is particularly painful for small caps with a high proportion of floating-rate debt.

To assess small-cap ETF performance in the first nine months, Oninvest expanded its sample from 38 to 108 funds, adding S&P SmallCap 600 sector ETFs, funds investing in smaller commodity producers, and single-country ETFs. Leveraged and inverse ETFs were excluded. Returns were calculated using Yahoo Finance data for December 31, 2025-September 30, 2026, and June 30, 2026-September 30, 2026, with dividends reinvested for funds and excluded for indexes. Of the 108 funds, 103 gained in the first nine months, but only 25 delivered positive returns in the third quarter. The average return was 12.8% for the first nine months and negative 5.7% for the third quarter.

The Invesco S&P SmallCap Information Technology ETF delivered the strongest return in the first nine months, gaining 42.77%. The Invesco S&P SmallCap Energy ETF ranked second with a return of 36.8%. Third was the VictoryShares Small Cap Free Cash Flow ETF, which selects companies based on free cash flow and gained 26.95%.

The third quarter reshuffled the leaders considerably: the Invesco S&P SmallCap Information Technology ETF, for example, lost 12.54% in the period. Energy was the only Russell 2000 sector to gain in the third quarter.

Among broad-based funds, the leaders in the first nine months were the First Trust Small Cap Growth AlphaDEX Fund (up 20.1%), First Trust Small Cap Core AlphaDEX Fund (up 19.98%), and Fidelity Enhanced Small Cap Core ETF (up 19.83%). Value stocks in the Russell 2000 gained 17% in the first nine months, outpacing growth stocks, which added 10.7%.

Funds tracking the S&P SmallCap 600 retained their lead over Russell 2000 funds in the first nine months. In the third quarter, however, S&P 600 funds lost around 8%, more than Russell 2000 funds.

Japanese ETFs led international funds in the first nine months. In the third quarter, Japanese and international value funds continued to rise as U.S. small caps declined. The MSCI ACWI ex-USA Small Cap Index gained 2.1% in the quarter.

Emerging markets were mixed: broad-based funds gained in the first nine months, while Chinese and Indian ETFs remained in negative territory.

Funds investing in small gold miners gained 16-17% in the quarter, but the VanEck Junior Gold Miners ETF only managed to break even for the first nine months. The Sprott Junior Uranium Miners ETF was the worst performer in our sample in the first nine months.

Invesco S&P SmallCap Information Technology ETF

The fund tracks the S&P SmallCap 600 Capped Information Technology Index. According to Invesco, it gained 42.7% on a net asset value basis through September 30, versus 14.08% for the S&P SmallCap 600.

Its portfolio holds 72 companies and is considerably more concentrated than broad-based funds: its 10 largest positions account for 28.5% of assets. As of Monday, the largest holdings were satellite operator Viasat (4.2%), measurement equipment maker Ralliant (3.41%), and enterprise IT services provider EPAM Systems (3.22%).

The fund trades at a higher valuation than the broader small-cap market. As of September 30, the portfolio’s price/earnings ratio was 30.4, forward P/E 19.2, and return on equity 6.5%. For comparison, the P/E of the overall S&P SmallCap 600 stands at 17.2, according to State Street data. Almost all the fund’s gains came in the first half: it lost 12.5% in the third quarter as tech small caps fell alongside other growth stocks amid the Fed’s rate hike and rising bond yields.

Invesco S&P SmallCap Energy ETF

The fund tracks the S&P SmallCap 600 Capped Energy Index, including refiners and pipeline operators. According to Invesco, it gained 36.7% on a net asset value basis through September 30, versus 14.1% for the S&P SmallCap 600.

The fund is small and highly concentrated. Its assets totaled around $103 million as of October 23, and its portfolio holds 34 companies, with the 10 largest accounting for around 48% of assets. Oil producer SM Energy is the largest holding, with a weight of 8.4%, followed by Magnolia Oil & Gas (5.4%) and drilling rig operator Noble (5.4%).

As of September 30, the fund’s holdings traded at 12.5 times annual earnings, around 2.5 times cheaper than the Invesco S&P SmallCap Information Technology ETF. In September, the fund distributed $0.41 per share, versus $0.24 a year earlier.

VictoryShares Small Cap Free Cash Flow ETF

The fund screens for the 300 small caps with the highest free cash flow yields, defined as free cash flow divided by enterprise value, then selects the 200 stocks with the strongest revenue and EBITDA growth metrics. Individual company weights are capped at 4%, and sector weights at 45%. When interest rates rise, this methodology screens out unprofitable companies that depend most heavily on borrowing, helping the fund gain in the third quarter. Net assets reached $835 million in October.

The portfolio is broadly diversified: its 10 largest positions account for just 13.2% of assets. As of Monday, its largest holdings were insurer Oscar Health (1.55%), ride-hailing service Lyft (1.49%), domain registrar GoDaddy (1.48%), and social media platform Pinterest (1.47%).

The fund’s sector allocation illustrates how it differs from the value index. As of September 30, energy accounted for 18.7% of the portfolio, versus 7.9% in the Russell 2000 Value Index, while financials made up just 1.8%, versus 28.4%. The fund has no exposure to real estate or utilities, which are among the sectors most sensitive to interest rates.

According to Victory Capital data as of September 30, the fund’s holdings traded at 21 times annual earnings, versus around 44 for the Russell 2000 Value, while return on equity was 14.6%, versus 3%. The fund gained 9% amid rising interest rates and oil prices.

Interest rates look set to continue to weigh on small caps, but valuations remain an argument in their favor: according to Royce, small- and micro-cap value stocks remain the cheapest segments of the U.S. equity market.

Inflows into small-cap ETFs slowed in September. The main question for the fourth quarter is whether earnings growth at smaller companies can offset higher borrowing costs or whether the rotation toward large caps and international markets will continue.

This text is for informational purposes only and does not constitute personalized investment advice.