Russell 2000 Beats S&P 500 Over Past 6 Months: ETFs in Focus

After a long period of underperformance, small-cap U.S. stocks may be staging a comeback. While it is too early to say for sure whether this is the start of a sustained rally or just an occasional rise, recent data show encouraging signs for small-cap investors.

iShares Russell 2000 ETF IWM gained about 28% over the past six months versus 23% gains in SPDR S&P 500 ETF Trust SPY. Earlier this month, the Russell 2000 topped 2,500 for the first time ever, as quoted on CNBC.

Much of the early-year weakness in small caps was caused by President Trump’s announcement of higher tariffs in April, which hit the smaller companies hard. However, several fresh tailwinds are setting the stage for a stable turnaround in small-cap stocks.

Fed Rate Cuts to Fuel Small Caps?

The annual inflation rate in the United States advanced to 3% in September 2025, the highest since January, from 2.9% in August and below the forecast of 3.1%. The Consumer Price Index increased 0.3% sequentially, below 0.4% in August and the expectation of 0.4%, per tradingeconomics.

The softer inflation data may help the Fed to cut rates in the coming months. The Fed has already enacted its first rate cut of 2025 in September and hinted at two more cuts this year. There is a 98.3% chance (at the time of writing) of a 25-bps rate cut in late October, per the CME FedWatch Tool.

A softer labor market is expected to lead the Fed to consider this path. The start of the continued monetary easing cycle (if there is any) is a plus for small-cap stocks and ETFs (read: Fed Cuts Rates & Hints at Two More Cuts in 2025: ETFs to Play).

Easing Trade Tensions

While Trump tariff tensions have weighed on the broader market in early 2025, trade tensions have eased a lot lately. Trump seemingly aims to sign a trade deal with China’s Xi during his Asia trip, as quoted on CNBC. The United States and India are also supposedly edging closer to a long-awaited bilateral trade agreement (read: The Geopolitical Windfall for Indian ETFs as Trump Hints at Tariff Cut).

Small-Cap Valuation Is Yet to Be Extremely Rich

Per WSJ data, the Russell 2000 is currently trading at a P/E ratio of 34.32 (as of Oct. 24, 2025), versus the year-ago level of 29.87X. The Russell 2000 is trading higher than the Nasdaq 100 Index.

The Nasdaq 100 Index is trading at a P/E ratio of 33.25X, above the year-ago level of 32.32X, per the Wall Street Journal data. In comparison, the S&P 500 Index traded at a P/E ratio of 25.58X, up from the year-ago level of 24.95. It shows that small caps are not cheap, if not extremely overvalued.

Winning Small-Cap ETFs in Focus

Here are a few small-cap U.S. ETFs that have topped the list in their segment over the past six months. Investors can keep a close track of these ETFs as they are high in momentum.

Fidelity Enhanced Small Cap ETF FESM

Six-Month Performance: Up 31.49%

One-Month Performance: Up 3.7%

AUM: $2.85 billion

Vanguard Russell 2000 ETF VTWO

Six-Month Performance: Up 29.4%

One-Month Performance: Up 3.6%

AUM: $13.3 billion

Federated Hermes MDT Small Cap Core ETF FSCC

Six-Month Performance: Up 31.7%

One-Month Performance: Up 2.2%

AUM: $53.5 million

Global X Russell 2000 ETF RSSL

Six-Month Performance: Up 29.2%

One-Month Performance: Up 3.2%

AUM: $1.34 billion

ProShares Russell 2000 High Income ETF ITWO

Six-Month Performance: Up 26.7%

One-Month Performance: Up 3.6%

AUM: $80.7 billion

Yield: 14.68%

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This article originally published on Zacks Investment Research (zacks.com).

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