How This Small-Cap ETF Can Play a Role in a Diversified Strategy

The Motley Fool

by newsfeedback@fool.com (David Dierking)

February 22, 2026

AI-Generated Deep Dive Summary

Small-cap stocks have long been overshadowed by their larger counterparts, but 2026 has marked a turning point. After years of underperformance driven by factors like low interest rates, stimulus spending, and the dominance of megacap tech stocks, small caps are experiencing a rebound as investors seek value and momentum in a shifting market. This shift highlights the importance of diversification and risk management in portfolio strategy. The iShares Core S&P Small Cap ETF (NYSEMKT: IJR) emerges as a key tool for capturing this opportunity, potentially enhancing risk-adjusted returns over time. Historically, small caps have struggled to match the growth of large-cap stocks, particularly during periods dominated by tech giants and AI-driven trends. Many portfolios became overweight in these high-growth sectors, leaving them vulnerable to market rotations. However, 2026 has seen a significant move away from tech, with investors now exploring alternative opportunities. This rotation has been fueled by a desire for value and momentum, driving small caps higher. The resurgence of small-cap stocks underscores the importance of diversification in building resilient portfolios. While large-cap tech stocks have delivered strong returns over recent years, relying too heavily on any single sector or market segment can increase risk. By including small-cap ETFs like IJR, investors can access a broader range of opportunities and reduce exposure to concentrated risks. This approach not only aligns with the principles of modern portfolio theory but also reflects the evolving nature of financial markets. For readers interested in finance and investing, understanding the role of small-cap ETFs is crucial. These funds provide an efficient way to gain exposure to smaller companies without the complexity or volatility of individual stock picking. As demonstrated in 2026, small caps can serve as a valuable component of a diversified strategy, offering both growth potential and diversification benefits. For investors looking to enhance their risk-adjusted returns, incorporating small-cap ETFs like IJR into their portfolios could be a wise move.

Verticals

financeinvesting

Originally published on The Motley Fool on 2/22/2026