This Small-Cap ETF Could Lead in 2026

Core Viewpoint - Small-cap stocks and related ETFs are showing positive momentum as 2025 concludes, indicating potential investment opportunities, particularly in the WisdomTree US Smallcap Quality Dividend Growth Fund (DGRS) [1] Group 1: Performance and Volatility - DGRS has outperformed the S&P SmallCap 600 Index over the past three years while exhibiting slightly lower annualized volatility [2] - The quality characteristics and favorable volatility traits of DGRS are expected to remain resilient in various economic conditions [3] Group 2: Economic Indicators and Federal Reserve Impact - Weakness in the labor market may prompt the Federal Reserve to continue lowering interest rates in 2026, with recent data showing inflation cooling to 2.7%, a four-year low [4] - The Fed's actions to support the economy are particularly relevant for DGRS, which allocates over 25% of its weight to financial services stocks, benefiting from increased demand for financing and corporate transactions [5] Group 3: Historical Context and Valuation - Historically, small-cap stocks have outperformed large-cap stocks in the months following Federal Reserve interest rate cuts, suggesting potential upside for DGRS in 2026 [6][7] - The S&P 600 is currently trading at over 15 times forecasted earnings, which is 30% lower than the S&P 500's valuation of over 22 times, indicating that small-cap stocks remain attractively valued [8]