Small companies were standout performers in the US market over the year to July 31, with the Russell 2000 index gaining 34% as investors sought opportunities outside the giant technology stocks that dominate the news.

The collective gains of small companies were higher than the S&P500’s gain of 18% in the same period.

“Small caps have outperformed large caps year-to-date despite the geopolitical backdrop and the shift in rate expectations. The drivers appear to be improving macro expectations and the lower valuations on offer in small caps,” according to Nick Sheridan and Richard Browm from Janus Henderson’s Global Smaller Companies Team.

“While large cap earnings growth forecasts are reasonable, small caps are expected to deliver stronger growth over the next two years, helped by lower funding costs, lower taxation, AI demand, nearshoring, and base effects,” they recently wrote.

They estimate global small cap earnings will rise by 33% from 2025 to 2026 and a further 17% from 2026 to 2027, “suggesting a possible meaningful earnings inflection after several years of limited post-COVID recovery”.

Characteristics of the global small-cap market

The US small caps universe offers a whole new set of potential satellite investments for advisers, with the Russell 2000’s largest weightings at July 31 including health care (19.82%), financials (18.87%) and industrials (15.97%).

“The recent outperformance of large companies has obscured the benefits for long-term investors who allocate some of their portfolio to US and global small caps,” says Wes Crill, Senior Client Solutions Director and Vice President at Dimensional.

“Since small caps represent a meaningful part of the global market – about 10% of the US by market capitalisation – they belong in a diversified portfolio. These are companies from a variety of sectors, and many have a diverse range of companies across sectors. After all, firms such as NVIDIA were start-ups before they were giants,” Crill says.

The biggest companies in the Russell 2000 include aerospace company Moog (NYSE: MOG A), crypto miner Hut 8 Corporation (NASDAQ: HUT), Umb Financial Group (NASDAQ: UMB) and cardiovascular pharmaceutical company Cytokinetics (NASDAQ: CYTK). Other familiar names within it include Krispy Kreme (NASDAQ: DNUT), Crocs (NASDAQ: CROX) and Victoria's Secret (NYSE: VSXY), alongside quantum computing company IonQ (NYSE: IONQ).

The average weighted market capitalisation of Russell 2000 constituents was US$4.04 billion at July 31, with a median market cap of US$1.15 billion.

Advisers who want to invest in this space can either trade direct international shares via AUSIEX or take a diversified position via international or domestic exchange traded funds (ETFs).

Several global small caps ETFs have been launched in Australia over the past 18 months, potentially trying to capture interest in the asset class at a time of stronger performance. This list of ETFs invested in this segment of the market now includes a relatively wide selection of active and passive funds. The majority are focused on global small caps, rather than just the US market, but nonetheless often allocate around 70% of their assets to US stocks. Some examples include:

• VanEck MSCI International Small Companies Quality ETF (ASX: QSML): A $1.6 billion fund which holds a portfolio of 150 companies based on three key fundamentals: high return on equity, earnings stability and low financial leverage.
• Vanguard MSCI International Small Companies Index ETF (ASX: VISM): A typical Vanguard passive fund that aims to track the MSCI World ex-Australia Small Cap Index at a low cost. Close to 70% of its assets are held in US small companies.
• Dimensional Global Small Company Active ETF (ASX: DGSM): At July 31, its 4,489 holdings included semiconductor company Astera Labs (NASDAQ: ALAB), Tenet Healthcare (NYSE: THC) and transportation and logistics company XPO Inc (NYSE: XPO).
• Macquarie Global Small Companies Active ETF (ASX: MQXS): Launched in June this year, this systematic ETF aims to overcome the inherent difficulty of analysing the huge global small cap universe via a data-driven approach.
• Global X Russell 2000 ETF (ASX: RSSL): Launched in February last year, this ETF is a pure play on US small caps and tracks the Russell 2000 RIC Capped Index – which uses a capping methodology to limit over concentration in any single security. The fund’s biggest holdings at 21 August were Hut 8 Corporation, precious metals miner SSR Mining (NASDAQ: SSRM) and Glaukos Corporation.
• Global X MSCI International Small and Mid Cap ETF (ASX: ISMD): Another new fund (launched in July this year) that provides exposure to global small and mid-capitalisation companies through the MSCI World ex Australia SMID Cap Select Index. Its top three holdings at August 21 were Sandisk, biotech Moderna (NASDAQ: MRNA) and entertainment conglomerate Warner Bros Discovery (NASDAQ: WBD).
• Antipodes Global SMID Active ETF (ASX: MIDS): Invests across developed and developing markets, with 45.1% exposure to US companies at July 31. The fund offers a self-described “eclectic portfolio” of companies, with a focus on those with a market capitalisation of US$1-30 billion. Its top 10 holdings include hybrid workspace provider International Workplace Group (LSE: IWG), US company Brookdale Senior Living (NYSE: BKD) and fintech Chime Financial (NASDAQ: CHYM).

The wide range of ETFs available – and ability for advisers to trade direct international shares if they choose – means that global small caps can be more readily added to client portfolios than previously.

To find out more about how to optimise your ETF trade execution, contact your Account Manager or a member of our Business Development team.