Here's the Surprising ETF Trouncing the S&P 500 in 2026

Core Viewpoint - The iShares Russell 2000 ETF (IWM) has outperformed the S&P 500 in 2026, gaining 6.8% year-to-date compared to a 0.1% decline in the S&P 500, and achieving a 17.6% return over the past year versus the S&P 500's 14.9% [1] Performance Comparison - The iShares Russell 2000 ETF has shown a significant performance advantage over the S&P 500, with a year-to-date gain of 6.8% and a one-year return of 17.6% compared to the S&P 500's 0.1% decline and 14.9% gain respectively [1] - The Russell 2000 Index, which the iShares ETF tracks, returned only 2.2% annually from 2020 to 2024, while the S&P 500 averaged 15.1% during the same period [1] Economic Context - Small-cap stocks, represented by the Russell 2000, faced challenges during the pandemic, including higher debt loads and inflation pressures, which led to underperformance compared to large caps [1] - The Federal Reserve's rate cuts in 2025, reducing the federal funds rate to 3.50%-3.75%, provided relief to small businesses, allowing for a rebound in earnings, which grew by 12% in late 2025 [1] Investment Characteristics - The iShares Russell 2000 ETF manages $76.2 billion in assets and has an expense ratio of 0.19%, making it a cost-effective option for investors seeking exposure to small-cap stocks [1] - The ETF's holdings are diversified across sectors such as industrials (19%), financials (17%), and healthcare (17%), with no single stock exceeding 1% of assets [1] Future Outlook - Economists project that the Federal Reserve may implement two to three more rate cuts in 2026, potentially lowering rates to 2.75%-3.00%, which could further benefit small-cap stocks [1] - Historically, small-cap stocks have outperformed large caps over long periods, delivering a 2% to 3% annual premium since 1926, except during periods of high interest rates [1]