Introduction

Exchange-traded funds (ETFs) are becoming more popular with investors, both individuals and institutions. In 2022, trading activity for ETFs hit an all-time high, reaching $5 trillion in the U.S. equity ETF market. However, only a small portion of this large amount of money was invested in small-cap ETFs.

Investors can benefit from small-cap stocks by including them in their portfolios through ETFs. Small-cap stocks faced challenges in 2022, with the Russell 2000 Index dropping by 21.6%. Concerns about geopolitical issues and the Federal Reserve’s rate hikes caused worries among investors about the U.S. economy and future earnings.

Despite the difficulties in 2022, small-cap stocks have rebounded in 2023 and have shown growth of 17% year-to-date as of late December. Over the past decade, small-cap stocks have performed well, with an annual increase of 10.8% through 2022, making them the second-best performing asset class after large-cap stocks. This success bodes well for small-cap ETFs.

Including the best ETFs that focus on U.S. small-cap stocks and those that invest in foreign small caps in your investment portfolio can help diversify and strengthen it.