A hot topic of debate among investors right now is whether small-cap stocks belong in your portfolio — and if so, how much. For most of the past few years, the U.S. stock market’s largest companies, especially the tech powerhouses, have delivered the biggest returns, while smaller companies have lagged. But that might be changing.
The iShares Russell 2000 ETF (NYSEMKT: IWM) is a broad index ETF of more than 2,000 small-cap stocks that has outperformed the S&P 500 (SNPINDEX: ^GSPC) of large caps over the past year and year to date. Smaller companies have recently shown strong earnings growth and might be undervalued compared to the big-name stocks.
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But if you want to own small-cap stocks, you don’t have to choose between large companies’ and small companies’ stocks. The Vanguard Total Stock Market ETF (NYSEMKT: VTI) lets you own nearly 3,500 stocks, representing the full range of the U.S. stock market — including large-cap, mid-cap, and small-cap stocks.
The iShares Russell 2000 ETF (IWM) has outperformed the Vanguard Total Stock Market ETF (VTI) through the first half of this year and over the past 12 months. But can this outperformance continue?
In the long run, over the past 10 years (through June 30), VTI has strongly outperformed IWM:
IWM Total Return Level data by YCharts
Let’s look at which of these U.S. stock index funds could be the best choice for your portfolio.
iShares Russell 2000 ETF (IWM): 2,021 stocks, 26 years of 8.9% annualized returns
The iShares Russell 2000 ETF ranks among the best small-cap ETFs. Its portfolio is designed to track the performance of the Russell 2000 index, and it holds a total of 2,021 stocks. These are smaller companies in a wide range of industries, not just major tech businesses.
The fund’s top five sector holdings are:
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Healthcare: 20.02% of the fund
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Financials: 18.96%
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Industrials: 15%
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Information technology: 13.86%
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Consumer discretionary: 9.65%
This fund has a long track record, dating back to May 2000. From its inception 26 years ago through the first half of 2026, it’s delivered annualized returns of 8.9%. That’s lower than the S&P 500’s overall average annual return of 10%. It’s also lower than the Vanguard Total Stock Market ETF, which has delivered long-term annualized returns of 9.6% from its inception in May 2001 through the first half of this year.
