Small-cap stocks are surging this month on strong momentum in the space. The Russell 2000 Index has jumped nearly 9% in July 2025 alone, outpacing the S&P 500 and Nasdaq Composite Indexes.
While several ETFs are riding high on this momentum, we have highlighted five of those that are leading the space over the past month and offer diversified exposure across various sectors. These are Avantis U.S. Small Cap Equity ETF AVSC, Invesco S&P SmallCap Value with Momentum ETF XSVM, JPMorgan BetaBuilders U.S. Small Cap Equity ETF BBSC, iShares US Small Cap Value Factor ETF SVAL and WisdomTree U.S. SmallCap Fund EES.
Here’s a deep dive into the driving forces behind the current rally:
Renewed Fed Rate Cut Hopes
The recent bouts of economic data pointing to cooling inflation and a slowing job market have revived expectations of Fed rate cuts in the second half of 2025. Traders are now pricing in a possible rate cut as early as September. As the pint-sized companies have a higher debt burden (mostly at floating rates), lower rates lead to reduced borrowing costs, helping small businesses expand their operations easily and resulting in increased profitability.
Deep Valuation Discounts
Valuation has been another key driver. Small-cap stocks have been trading at a steep discount of nearly 55% to large caps by P/E. The forward P/E ratio for the Russell 2000 is currently near 14.2x, compared to 20.5x for the S&P 500. Investors, especially institutional funds, are beginning to rotate out of overbought mega-cap names and into under-owned areas of the market, including small-caps. This rotation has accelerated in July, leading to broad-based gains in small-cap ETFs.
Rebound in Sectors like Financials and Industrials
Small-cap companies in the financials, industrials, and consumer discretionary sectors, which together make up over 50% of the Russell 2000, are rebounding strongly. In particular, regional banks, which were battered in 2023–24 amid rate volatility and commercial real estate concerns, are staging a comeback as balance sheets stabilize and credit risks abate. Meanwhile, manufacturing and transportation stocks are gaining on improving supply chain dynamics and increased infrastructure-related spending (read: Big Banks Q2 Earnings Thrive: ETFs in Focus).
Increased M&A Activity
The M&A activity has picked up, especially around small and mid-sized firms in the healthcare, biotech, and tech services sectors. With cash-rich large-cap companies looking for growth through acquisitions, small-caps have become attractive targets due to their innovation and lean valuations. This speculative momentum is attracting active fund managers and hedge funds, adding further liquidity to the small-cap space.
Retail Investor and AI-Driven Strategies
Retail investors are returning to small-caps as the fear of recession fades and bullish sentiment builds. Trading volumes in popular small-cap names and ETFs have surged, fueled in part by social media chatter and AI-driven trading platforms. Quant-based hedge funds and AI-enhanced strategies are also contributing to the momentum, amplifying moves in thinly traded small-cap stocks (read: Small Business Optimism Grows: What's Ahead for ETFs?).
ETFs Riding the Momentum
Avantis U.S. Small Cap Equity ETF (AVSC) – Up 10.1%
Avantis U.S. Small Cap Equity ETF invests in a diverse group of U.S. small-cap companies, taking into consideration valuation, profitability and levels of investment when selecting and weighting securities. It holds a broad basket of 1287 stocks with key holdings in financials, industrials, consumer discretionary and healthcare. Avantis U.S. Small Cap Equity ETF has amassed $1.7 billion and trades in an average daily volume of 111,000 shares. It charges 25 bps in annual fees from investors.
Invesco S&P SmallCap Value with Momentum ETF (XSVM) – Up 9.5%
Invesco S&P SmallCap Value with Momentum ETF offers exposure to the companies having the highest "value scores" and "momentum scores" by tracking the S&P 600 High Momentum Value Index. It holds a basket of 122 stocks with key holdings in financials, which makes up for half of the portfolio. Invesco S&P SmallCap Value with Momentum ETF has AUM of $574.1 million and an average daily volume of 62,000 shares. XSVM charges 36 bps in annual fees and has a Zacks ETF Rank #3 (Hold).
JPMorgan BetaBuilders U.S. Small Cap Equity ETF (BBSC) – Up 9.4%
JPMorgan BetaBuilders U.S. Small Cap Equity ETF provides exposure to the small-cap U.S. equity market using an indexed approach. It follows the Morningstar US Small Cap Target Market Exposure Extended Index and holds 749 stocks in its basket. JPMorgan BetaBuilders U.S. Small Cap Equity ETF has key holdings in financials, industrials, information technology, health care, and consumer discretionary. It has AUM of $566.5 million and trades in an average daily volume of 13,000 shares. It charges 9 bps in fees per year and has a Zacks ETF Rank #2 (Buy).
iShares US Small Cap Value Factor ETF (SVAL) – Up 9%
iShares US Small Cap Value Factor ETF offers exposure to the historically rewarded value and size factors through 250 U.S. small-cap companies with prominent value characteristics. It follows the Russell 2000 Focused Value Select Index and holds 250 stocks in its basket. Financials is the top sector with a 47.1% share in the portfolio, followed by 13.7% in industrials, 9.2% in consumer discretionary and 7.8% in energy. iShares US Small Cap Value Factor ETF has AUM of $140.8 million and trades in a volume of 16,000 shares a day on average. It charges 20 bps in annual fees.
WisdomTree U.S. SmallCap Fund (EES) – Up 8.7%
WisdomTree U.S. SmallCap Fund targets 901 earnings-generating small-cap companies by tracking the WisdomTree U.S. SmallCap Index. From a sector look, financials takes the largest share at 27.5% of the assets, while consumer discretionary and industrials round off the next spots with double-digit exposure each. WisdomTree U.S. SmallCap Fund has amassed $606.9 million in its asset base and sees a moderate volume of around 27,000 shares per day. It charges 38 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
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WisdomTree U.S. SmallCap ETF (EES): ETF Research Reports
Invesco S&P SmallCap Value with Momentum ETF (XSVM): ETF Research Reports
iShares US Small Cap Value Factor ETF (SVAL): ETF Research Reports
JPMorgan BetaBuilders U.S. Small Cap Equity ETF (BBSC): ETF Research Reports
Avantis U.S. Small Cap Equity ETF (AVSC): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
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