Small-cap ETFs Outperform Large Caps in 2026 Rally

Small-cap index ETFs posted stronger returns than large-cap funds through July 29, 2026, with the SPDR S&P 600 ETF (SPSM) up about 21% year-to-date. That performance exceeded the S&P 500 by more than 1,300 basis points.

The divergence in returns reflects differences in sector weightings. The low-cost SPDR Portfolio S&P 500 ETF (SPYM) held roughly 36% of assets in information technology as of July 29 and returned about 7.7% year-to-date. SPSM had about 12% in technology and larger allocations to economically sensitive sectors, with financials near 19% and industrials around 18%.

Within technology, a small-cap tech fund outperformed the mega-cap tech benchmark. The Invesco S&P SmallCap Information Technology ETF (PSCT) gained roughly 37% year-to-date, while the Technology Select Sector SPDR Fund (XLK) returned about 19% over the same period. PSCT’s gains were concentrated in smaller technology companies including electronic manufacturing services provider Plexus and satellite communications firm ViaSat.

Factor-based free cash flow ETFs showed similar patterns. The VictoryShares Small Cap Free Cash Flow ETF (SFLO) returned about 29% year-to-date through late July, slightly ahead of the VictoryShares Free Cash Flow ETF (VFLO), which gained about 28%. SFLO had roughly 26% exposure to technology versus VFLO’s 23% and listed top contributors such as Extreme Networks, RingCentral and Penguin Solutions.

Asset sizes and investor flows differed markedly. SPYM attracted about $52 billion of new cash year-to-date through late July, while SPSM gathered just over $1 billion. PSCT held close to $500 million in assets compared with about $115 billion in XLK. SFLO had roughly $650 million in assets, while VFLO stood near $9 billion as of late July.

Market breadth expanded beyond a narrow group of mega-cap technology stocks during the period through late July 2026. Small-cap indexes with higher weights in financials and industrials recorded larger gains when cyclical sectors participated in the rally.

Index providers and ETF sponsors note that sector weights and index methodology affect fund outcomes. Analysts and asset managers advise examining an ETF’s holdings and methodology to understand sector exposure and factor definitions.

The performance gap through late July highlights differing returns, sector exposures and asset bases across core and factor ETFs in U.S. equity markets in 2026.