Core Viewpoint - The article discusses two ETFs, VictoryShares Free Cash Flow Next Shares ETF (SFLO) and Invesco S&P SmallCap 600 QVM Multi-Factor ETF (QVMS), as alternatives to the iShares Russell 2000 ETF (IWM) for small-cap investment, addressing the profitability issues associated with IWM's market-cap-weighted methodology [1]. Group 1: SFLO - Free Cash Flow Focus - SFLO targets small-cap companies with high free cash flow (FCF) yields, addressing the profitability problem inherent in IWM, which includes unprofitable "zombie" companies [1]. - The fund tracks the VettaFi Free Cash Flow Next Index, which filters for companies that can reinvest in operations, pay dividends, buy back shares, or make acquisitions, thereby creating shareholder value [1]. - Companies with a strong FCF cushion are better positioned to withstand market volatility, which is crucial in the current economic environment [1]. Group 2: QVMS - Multi-Factor Approach - QVMS employs a multi-factor strategy focusing on quality, value, and momentum, differentiating itself from IWM by not including companies from the Russell 2000 [1]. - The fund narrows its focus to the S&P SmallCap 600 index, which has a baseline profitability requirement for inclusion, ensuring that its holdings are fundamentally sound [1]. - By integrating a multi-factor approach into a higher-quality index, QVMS mitigates the risk of value traps that can occur in market-cap-weighted indices like IWM [1]. Group 3: Market Context and Investment Strategy - Advisors and investors are increasingly interested in small-cap opportunities as valuations of certain mega-cap companies appear overstretched [1]. - The article emphasizes the importance of using discerning screening methodologies, such as those employed by SFLO and QVMS, to filter out unprofitable companies in the small-cap space [1]. - The focus on fundamentals is highlighted as essential for navigating the challenging market environment [1].

Group 1: Mid-Cap Investing Insights - Mid-cap investing offers a blend of resilience and growth opportunities, seen as safer than small caps but riskier than large caps [1] - Many mid-cap ETFs are currently performing well, hovering around month-high levels, indicating potential investment opportunities [1][8] Group 2: Market Conditions Affecting Large Caps - The global market remains steady despite trade tensions, particularly due to new tariffs imposed by the U.S. government [2] - The International Monetary Fund (IMF) projects global growth rates of 3.3% for 2026 and 3.2% for 2027, with no significant improvement expected [3] Group 3: Favorable Conditions for Smaller-Cap Stocks - The Federal Reserve has implemented three rate cuts totaling 0.75 percentage points in 2025, which may benefit smaller-cap stocks due to their domestic focus [4] - Projections for real GDP growth have been revised upward for 2026 and 2027, suggesting a potential rally for small-cap stocks [5] - Unemployment rates are expected to decline, and inflation projections have been slightly adjusted, favoring domestically-focused stocks like small and mid-caps [6] Group 4: Volatility and Caution in Small-Cap Stocks - Despite favorable projections, small-cap stocks may experience high volatility due to tariff-related inflation fears and a still-weak labor market [7] Group 5: Mid-Cap ETFs Performance - Several mid-cap ETFs have shown strong performance over the past month, outperforming the SPDR S&P 500 ETF Trust [8] - Specific mid-cap ETFs highlighted include: - WisdomTree US MidCap Quality Growth Fund (QMID) – Up 2% over the past month [9] - State Street SPDR S&P 400 Mid Cap Value ETF (BBMC) – Up 3% over the past month [9] - Janus Henderson Mid Cap Growth Alpha ETF (JMID) – Up 1.7% over the past month [9] - Invesco S&P MidCap Low Volatility ETF (XMLV) – Up 1.5% over the past month [9]

Core Insights - The Russell 2000 serves as the primary benchmark for small-cap investments, demonstrating strong performance in favorable market conditions [1] - The Vanguard Russell 2000 ETF is highlighted as a cost-effective option for investors, with a low expense ratio of 0.06% and a strategy of holding all stocks in the index [2] - The index comprises approximately 2,000 stocks with market caps ranked between 1,001 and 3,000, including both profitable and unprofitable companies [4] Investment Environment - In bull markets, unprofitable stocks within the Russell 2000 can outperform as investors are more inclined to take risks on speculative companies [5] - Long-term investment cycles benefit from exposure to both high-quality and lower-quality companies, allowing investors to navigate market fluctuations effectively [5][9] Comparison with Other Indexes - The S&P 600 index, which is linked to funds like the iShares Core Small Cap ETF, includes stocks outside the S&P 500 and S&P MidCap 400, but applies a quality screen requiring positive earnings [8] - The S&P 600 is tilted towards larger and higher-quality companies, making it a potentially less risky option compared to the Russell 2000 [8] Conclusion - The Vanguard Russell 2000 ETF is considered the best option for long-term investors due to its comprehensive exposure to the small-cap market and its inclusive nature compared to alternative indexes [9]

Core Viewpoint - The article discusses the challenges and opportunities in small-cap investing, highlighting the shift of companies staying private longer and the advantages of investing in small-cap ETFs like the Invesco NASDAQ Future Gen 200 ETF (QQQS) [1] Group 1: Small-Cap Market Dynamics - Historically, small-cap companies have transitioned to large-caps, providing significant returns for early investors [1] - There is a trend of companies opting to remain private longer, entering the market as large- and mega-cap entities, which may negatively impact the quality of small-cap stocks [1] - Investing in individual small-caps presents substantial rewards and risks, making ETFs a more favorable option for many investors [1] Group 2: Invesco NASDAQ Future Gen 200 ETF (QQQS) - The QQQS ETF tracks the Nasdaq Innovators Completion Cap Index and is positioned as a modern alternative to traditional small-cap funds [1] - The index comprises 200 small-cap companies with the most valuable patent portfolios relative to their market value, indicating a focus on companies with credible growth traits [1] - The presence of valuable patents may signal competitive advantages and potential future revenue growth for the companies within the ETF [1]

Core Insights - The Vanguard Small-Cap ETF (VB) and the State Street SPDR Portfolio S&P 600 Small Cap ETF (SPSM) are both low-cost options for investors interested in U.S. small-cap stocks, but they differ in portfolio composition and performance nuances [1] Cost & Size - Both VB and SPSM have an expense ratio of 0.03% [2][3] - As of February 12, 2026, VB has a 1-year return of 10.65% compared to SPSM's 10.28% [2] - SPSM offers a higher dividend yield of 1.53% versus VB's 1.27% [2] - VB has significantly larger assets under management (AUM) at $169 billion compared to SPSM's $14 billion [2] Performance & Risk Comparison - Over the past five years, VB experienced a maximum drawdown of -28.16%, while SPSM had a slightly lower drawdown of -27.95% [4] - An investment of $1,000 in VB would have grown to $1,260 over five years, while the same investment in SPSM would have grown to $1,216 [4] Portfolio Composition - SPSM tracks the S&P SmallCap 600 Index and includes 607 stocks, with top sectors being financial services (17%), industrials (16%), and consumer cyclical (15%) [5] - VB holds a broader portfolio of 1,324 stocks, with a focus on industrials (19%), technology (17%), and financial services (13%) [6] Investment Implications - VB's greater diversification, with more than twice the number of stocks as SPSM, may help limit risk associated with small-cap stocks [7] - VB's heavier allocation to technology (17% vs. 13% for SPSM) may lead to higher volatility but also greater long-term returns [8] - Both funds have shown similar total returns over 12 months and five years, but VB has slightly outperformed SPSM in both periods [9]

Core Insights - The Schwab U.S. Small-Cap ETF (SCHA) has achieved a 5.5% return year-to-date, benefiting from its low annual expense ratio of 0.04%, which is among the lowest in the small-cap category [2][8] - Recent analyses have shown mixed opinions on SCHA, with some sources highlighting its attractiveness due to low costs and historical performance, while others have downgraded it, suggesting that current market conditions favor large-cap stocks over small-cap stocks [3] Interest Rate Impact - Small-cap stocks are significantly affected by borrowing costs, as they rely more on debt for growth compared to larger firms. The current 10-year Treasury yield is at 4.24%, which poses challenges for small-cap companies [4][8] - If Treasury yields rise towards 4.5% or higher, the increased cost of capital could compress small-cap valuations more rapidly than those of large caps, making interest rate direction a critical factor for SCHA's near-term performance [4] Portfolio Composition - SCHA's portfolio is highly diversified, containing over 500 positions with no single holding exceeding 0.50% of total assets, which shifts performance drivers from individual stock selection to sector allocation [6] - The fund's major sector allocations include Industrials, Financials, and Information Technology, which together account for approximately half of the total assets and are key determinants of the fund's performance relative to its benchmark [6] Notable Holdings - The ETF has significant exposure to emerging sectors such as quantum computing through Rigetti Computing (RGTI), renewable energy infrastructure, and cryptocurrency mining operations [7] - Rocket Companies (RKT), a top holding, illustrates the volatility and growth potential typical of small-cap businesses that have not yet scaled their operations [7]

Core Insights - Macroeconomic conditions for 2026 appear uncertain, yet small-cap investments may present significant opportunities as they are poised to potentially outperform large-cap counterparts [1] - The Federal Reserve's anticipated rate cuts could particularly benefit small-cap companies, allowing them to leverage lower rates for growth [1] - Additional favorable factors for small-caps include reduced regulations, momentum in AI, and the ongoing reshoring trend in the U.S. [1] Small-Cap Investment Strategies - Investors are advised to consider a more fundamental approach to small-cap investing rather than relying solely on market cap weighted funds like the iShares Russell 2000 ETF (IWM), which exposes them to both high and low-performing stocks [1] - The O'Shares U.S. Small-Cap Quality Dividend ETF (OUSM) exemplifies a fundamental approach, focusing on companies with low volatility, high quality, and strong dividend yields [1] - OUSM's strategy is based on a factor-driven evaluation of securities, aiming to provide similar results to the O'Shares U.S. Small-Cap Quality Dividend Index (OUSMX) while mitigating volatility [1] Sector Analysis - As of January 26, 2026, the top three sectors in IWM's portfolio are industrials, health care, and financials, while OUSM's top sectors are industrials, financials, and consumer discretionary, with health care ranked fifth [1] - This sector differentiation highlights the potential for a more targeted investment strategy within the small-cap space [1] Market Outlook - The small-cap market is still in the early stages of a potential comeback, providing investors and advisors ample time to adjust their portfolios [1] - A fundamental-based approach to small-cap investing, such as that offered by OUSM, may yield benefits as the small-cap rally gains momentum [1]

Core Viewpoint - ProShares Russell 2000 Dividend Growers ETF (SMDV) offers a systematic approach to invest in U.S. small-cap companies with a strong history of increasing cash dividends, focusing on quality and income within a volatile market segment [1] Group 1: Investment Strategy - SMDV selects dividend-growth companies and applies systematic constraints to enhance diversification, prioritizing profitability, balance-sheet discipline, and shareholder return policies over maximum yield [1] - The fund typically exhibits lower leverage and higher quality compared to the broader small-cap universe, which can help mitigate drawdowns while limiting upside during speculative market phases [1] Group 2: Target Audience - Likely users of SMDV include income-oriented multi-asset investors seeking sustainable dividend growth and allocators looking to combine quality with small-cap exposure [1] Group 3: Market Conditions - Favorable conditions for dividend growers include balance-sheet prudence, earnings resilience, and stable policy rates, while early-cycle surges and rapid rotations towards unprofitable growth may hinder performance [1] Group 4: Fund-Specific Risks - A specific risk associated with SMDV is the potential for increased turnover and sector skews due to rules-based reconstitution effects if dividend policies of the underlying companies change, which may lead to greater tracking dispersion compared to broader small-cap exposures [1]

Core Insights - The ETF ecosystem is rapidly expanding, with particular attention on the T. Rowe Price Small-Mid Cap ETF (TMSL), which has recently sent a buy signal and may carry momentum into the new year [1][2] Performance Metrics - TMSL has seen its price rise above both its 50 and 200-day simple moving averages, indicating a traditional buy signal [2] - The ETF has returned 12.7% year-to-date (YTD) in 2025, outperforming the category average of 7% [3] - Over the last three years, TMSL has delivered a return of 45.2% [3] Market Context - Small-cap stocks have generally underperformed recently, but TMSL may be positioned for a positive year in 2026, potentially benefiting from anticipated rate cuts by the Federal Reserve [4] - Investing in small-caps like TMSL offers diversification away from the concentration risk associated with large-cap tech stocks [5] Investment Strategy - TMSL employs an active SMIDcap approach, leveraging T. Rowe Price's fundamental research to identify firms with strong earnings quality, effective management capital allocation, high return on equity, and near-term appreciation potential [6]

Core Insights - Small-cap equities have shown impressive performance over the past 90 days, with some major indices recording double-digit gains, indicating responsiveness to Federal Reserve interest rate cuts [1] - The recent strength in small-caps may encourage investors to explore more sophisticated investment strategies, such as the O'Shares U.S. Small-Cap Quality Dividend ETF (OUSM) [2] Fund Overview - OUSM is a $917.8 million fund that emphasizes dividends, low volatility, and quality, distinguishing itself from many traditional small-cap ETFs [3] - The fund's methodology is seen as a potential driver for a rally into year-end, positioning it as a viable small-cap investment for 2026 [4] Market Outlook - Goldman Sachs Asset Management (GSAM) believes small caps present a strong investment opportunity, supported by easing cycles and attractive valuations, with earnings growth expected to accelerate [5] - Although OUSM was not directly mentioned in the GSAM report, it is suggested that nuanced approaches to small-cap investing could yield rewards [6] Sector Focus - GSAM highlights aerospace/defense, strong consumer names, healthcare, and technology as key sectors for small-cap investments, with OUSM allocating 63% of its portfolio to these sectors [7] Earnings Performance - U.S. small-cap earnings are showing signs of a strong rebound, with the second quarter of 2025 marking the first positive earnings due to improving sales and margins [8] - Notably, 25% of Russell 2000 companies have reported at least two consecutive quarters of accelerating earnings, with expectations for this momentum to continue into 2026 [8]