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Dear Fellow Investor,
With More Rate Cuts on the Way, Bet on Small Cap Stocks
Things are looking increasingly promising for small-cap stocks—and the timing couldn’t be better for investors seeking opportunity. After a long stretch of elevated rates, the Federal Reserve’s recent pivot toward easing has set the stage for what could be a strong multi-quarter run for smaller companies. With more rate cuts expected this year—potentially two additional moves—investors may want to position ahead of the trend rather than wait for the rally to fully materialize.
Small caps are often among the biggest beneficiaries of a declining-rate environment. These companies typically rely more heavily on borrowing than their large-cap counterparts. When interest rates fall, their cost of capital declines meaningfully, directly improving profitability and freeing up cash for expansion, hiring, acquisitions, and product development. Lower rates also tend to loosen financial conditions more broadly, giving small-cap businesses easier access to credit—something that can be a lifeline for companies with tighter cash flows.
Historically, periods of Fed easing have produced strong results for small-cap benchmarks. After rate cuts begin, small caps have often outperformed the S&P 500 over the following 6–12 months. While past performance can't predict future results, it does paint a compelling picture—especially as investors are increasingly expecting a friendlier monetary policy through the rest of the year.
For those looking to capitalize on this trend, there are two main approaches: picking individual small-cap stocks or investing through diversified exchange-traded funds. Many investors prefer ETFs because they offer exposure to hundreds or even thousands of companies at once, reducing single-stock risk while still capturing the upside potential of the broader small-cap category. Here are three standout ETFs worth a closer look.
ETF: Vanguard Small-Cap ETF (SYM: VB)
The Vanguard Small-Cap ETF (SYM: VB) is one of the most popular and cost-effective ways to gain exposure to U.S. small-cap companies. With an expense ratio of just 0.05%, it’s among the cheapest funds in its category, allowing investors to keep more of their returns.
VB tracks the CRSP US Small Cap Index, holding 1,336 stocks across a wide range of sectors. Some of its better-known holdings include SoFi Technologies, NRG Energy, Atmos Energy, Reddit Inc., and Pure Storage. The fund’s broad diversification helps balance volatility while still giving investors exposure to the small-cap growth engine.
Another advantage of VB is its quarterly dividend, which adds an income component that many small-cap investors overlook. Most recently, the fund paid a dividend of just over $0.80 per share on October 1. Prior to that, it distributed just over $0.78 per share on July 2, and just over $0.91 per share on March 31.
VB remains a favorite for long-term investors due to its combination of low fees, broad exposure, and consistency. In an environment where small caps could thrive, VB offers a simple, efficient way to position for the upside.
InvestorPlace Media
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ETF: iShares Russell 2000 ETF (SYM: IWM)
The iShares Russell 2000 ETF (SYM: IWM) is arguably the most widely recognized and heavily traded small-cap ETF on the market. It gives investors exposure to the Russell 2000 Index, a benchmark often used by institutions and analysts to track the performance of small-cap U.S. companies.
IWM carries an expense ratio of 0.19%, which is higher than VB or SCHA but still relatively low considering the fund’s liquidity and market presence. The ETF holds 1,965 stocks, spanning technology, healthcare, industrials, consumer discretionary, and more. Some of its holdings include Credo Technology, Bloom Energy, IONQ Inc., Fabrinet, and Rambus Inc.
The fund also pays a quarterly dividend. Its most recent distribution, on September 19, was just over $0.67 per share. Before that, it paid just over $0.57 per share on June 20, and just over $0.45 per share on March 21. The steady growth in payouts reflects improving underlying cash flow for many Russell 2000 components.
As one of the highest-profile small-cap ETFs, IWM is often the first choice for traders seeking liquidity, as well as long-term investors who want broad exposure to the small-cap universe. If small caps begin to rally on rate-cut momentum, IWM could be a major beneficiary.
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ETF: Schwab U.S. Small-Cap ETF (SYM: SCHA)
For investors seeking the lowest possible cost structure combined with expansive diversification, the Schwab U.S. Small-Cap ETF (SYM: SCHA) is an excellent candidate. With an expense ratio of just 0.04%, it is one of the least expensive ETFs of any type on the market.
SCHA tracks the Dow Jones U.S. Small Cap Total Stock Market Index and holds 1,687 stocks, including Reddit, Credo Technology, Affirm Holdings, Bloom Energy, and IONQ Inc. Its broad exposure is similar to VB, though the underlying index methodology differs slightly.
The fund also distributes a quarterly dividend. On September 29, SCHA paid just over $0.08 per share. Previously, it paid just over $0.08 per share on June 30, and just over $0.05 per share on March 31. While the payouts are smaller than those of VB or IWM, they are consistent and add incremental income to a long-term portfolio.
Many investors are increasingly drawn to Schwab’s low-cost ETF lineup, and SCHA stands out as a cost-efficient way to tap into potential small-cap upside as the rate-cut cycle develops.
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Are there any specific small cap stocks that you're buying right now? What other sectors of the market are you currently interested in? Hit "reply" to this email and let us know your thoughts!
