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Uncertainty around tariffs, inflation, and the economy has driven investors to sell overpriced stocks in favor of undervalued investments in 2025. As a result, previously unpopular pockets of the market—such as defensive sectors and low-volatility stocks—areoutperforming this year, while the overpriced market darlings of the past few years—namely large-growth stocks—havestruggled.
Is It Time to Buy Small-Cap Stocks?
Yet despite the ongoing underperformance, Morningstar chief US market strategist Dave Sekera suggests investors overweight small-cap stocks relative to large-cap stocks today.
“By capitalization, small-cap stocks are the most undervalued,” he observes. Sekera notes that at the end of April, small-cap stocks were trading at a 25% discount to Morningstar’s fair value estimate, while large-cap stocks were just 8% undervalued.
However, Sekera acknowledges that investing in small caps right now requires patience: It could take a while before the market sentiment shifts to a positive view on small-company stocks.
“Historically, small-cap stocks have performed best when the Fed is easing monetary policy and the economy is poised to begin rebounding,” he explains. “That does not appear to be the case in the near term. So, while these stocks are undervalued, it may not be until later this year or early 2026 that small caps start to work.”
So why not wait for the rebound to begin before buying? “Once sentiment in the market turns positive and investors recognize how attractive valuations are across the small-cap space, those stocks could rally quickly as it wouldn’t take much of a rotation out of large-cap stocks to push small caps higher,” says Sekera.
Investors who’d like to tilt their portfolios toward small-cap stocks (or those who may simply find their portfolios light on smaller companies) but who don’t want to pick individual stocks have several top exchange-traded funds to choose from.
The 6 Best ETFs to Buy That Invest in Small-Cap Stocks
These ETFs all land in one of the US small-cap Morningstar Categories and earn Morningstar Medalist Ratings of Gold with 100% analyst coverage. All data is as of April 30, 2025.
Dimensional US Small Cap ETF DFASDimensional US Targeted Value ETF DFATSPDR Portfolio S&P 600 Small Cap ETF SPSMVanguard Small-Cap ETF VBVanguard Small-Cap Growth ETF VBKVanguard Small-Cap Value ETF VBR
Our list of the top small-cap ETFs to invest in illustrates that there are many ways to pursue a small-cap strategy. For example, while most of the names on this list are passively managed, two actively managed options made the cut. The ETFs that are passively managed all track different small-cap stock indexes, too.
Small-Cap ETFs With Top Morningstar Ratings
|
Name/Ticker |
Active or Index Fund? |
Index Tracked |
Morningstar Category |
|---|---|---|---|
|
Dimensional US Small Cap ETF DFAS |
Active |
N/A |
Small Blend |
|
Dimensional US Targeted Value ETF DFAT |
Active |
N/A |
Small Value |
|
SPDR Portfolio S&P 600 Small Cap ETF SPSM |
Index |
S&P 600 Small Cap Index |
Small Blend |
|
Vanguard Small-Cap ETF VB |
Index |
CRSP US Small Cap Index |
Small Blend |
|
Vanguard Small-Cap Growth ETF VBK |
Index |
CRSP US Small Cap Growth Index |
Small Growth |
|
Vanguard Small-Cap Value ETF VBR |
Index |
CRSP US Small Cap Value Index |
Small Value |
Here‘s more about each of the top small-cap ETFs to buy, along with commentary from the analyst who covers the fund.
Dimensional US Small Cap ETF
Active or Index? ActiveMorningstar Category: Small BlendTop Three Sectors: Financial Services (20%), Industrials (19%), Technology (15%)
The first of two actively managed quantitative funds on our list of the best small-cap ETFs to invest in, Dimensional US Small Cap ETF follows a rules-based strategy that provides exposure to stocks representing the bottom 10% of the investable US market.
“DFA US Small Cap and Dimensional US Small Company are backed by a quantitative strategy that provides diversified access to profitable small-cap US stocks. In what can be a risky market segment, this approach should give investors a better shake than most.
“The strategy targets the smallest 10% of US equities that pass its investability criteria and additional screens. REITs, recent IPOs, and stocks with market caps of less than USD 10 million are excluded from the opportunity set. Unprofitable companies and those with high asset growth are also removed because DFA’s research shows these traits detract from stock performance. This adds a slight quality tilt to the market-cap-weighted portfolio.
“Weighting holdings by market cap is an efficient approach that harnesses the market’s consensus opinion of each stock’s relative value. Stocks that grow in size take up a larger share of the portfolio, while smaller companies that may be struggling take on a less important role. Market-cap weighting also helps rein in transaction costs and promotes diversification.
“This strategy further manages these costs by allowing traders flexibility during rebalances. Traders have the freedom to choose which stocks to trade and can spread those trades over multiday periods. This ensures the traders prioritize names that are less expensive to transact for the funds.
“The strategy operates on the smaller end of the small-cap market. Small-cap stocks tend to be more volatile than their larger peers. However, the funds’ focus on profitable stocks should minimize this effect.
“While the smaller names that constitute this portfolio can be volatile, the strategy’s broad reach ensures that one stock’s misfortune should not derail the entire portfolio. It stashes just 6% of its assets in its top 10 holdings.”
Zachary Evens, Morningstar analyst
Read Morningstar’s full report on Dimensional US Small Cap ETF.
Dimensional US Targeted Value ETF
Active or Index? ActiveMorningstar Category: Small ValueTop Three Sectors: Financial Services (30%), Industrials (14%), Consumer Cyclical (14%)
The first of two value-focused funds on our list of the best small-cap ETFs, Dimensional US Targeted Value focuses on stocks from the cheaper half of the US mid- and small-cap markets.
“DFA US Targeted Value Portfolio follows a time-tested process focused on the small-value segment of the US market. Its broad portfolio, cost-effective execution, and competitive fee should give it a long-term advantage.
“This strategy focuses on stocks from the cheaper half of the US mid- and small-cap markets in a cost-effective way. It avoids holding companies with poor profitability, which should steer the portfolio away from the riskiest names in its selection universe, and it weights constituents by their market cap. This low-turnover approach captures the market’s collective opinion of each stock’s value while cutting back on trading costs.
“Dimensional’s traders build on that cost-effective approach. They select trades from an eligible pool provided by the fund’s portfolio managers. Traders can substitute a given stock for another with similar size and value characteristics, and they can trade patiently to further curb transaction costs.
“The portfolio lands among the broadest and most diversified in the small-value Morningstar Category. It holds more than 1,400 stocks, while its 10 largest positions represent about 7% of assets. The fund’s price/book ratio has been similar to the Russell 2000 Value Index. But including mid-cap stocks and tilting toward profitable firms means the portfolio’s average market cap and profitability have been higher than the index’s.”
Dan Sotiroff, Morningstar senior analyst
Read Morningstar’s full report on Dimensional US Targeted Value ETF.
SPDR Portfolio S&P 600 Small Cap ETF
Active or Index? IndexMorningstar Category: Small BlendTop Three Sectors: Financial Services (18%), Industrials (17%), Consumer Cyclical (13%)
The first passive fund on our list of small-cap ETFs to buy, SPDR Portfolio S&P 600 Small Cap ETF generally invests substantially all, but at least 80%, of its total assets in the securities comprising its index.
“The fund uses a representative sampling to construct a portfolio that mimics the performance of the S&P 600 Small Cap Index and minimizes investors’ tax bills. Despite a sampling approach, the portfolio rarely excludes more than a handful of stocks.
“Through sampling the S&P SmallCap 600 Index, the fund captures the small-cap segment of the total investable US equity market. An index committee determines the 600 constituents from a universe of US-domiciled stocks that pass its investability criteria. These criteria include a market cap between USD 1.0 billion and USD 6.7 billion, minimum liquidity requirements, and positive GAAP earnings for the past 12 months and in the most recent quarter. The profitability requirement helps shield it from less stable companies, especially among its smallest constituents. IPOs are eligible for inclusion only after 12 months of trading. This helps to ensure that these firms are financially viable and allows time for the market to incorporate a broader swath of market participants’ views into their share prices.
“The index does not reconstitute on a regular cadence like competitor indexes and instead makes changes as the committee sees fit. Existing constituents are removed only if they continually and substantially violate the index’s inclusion criteria, as the index committee allows temporary deviations. This approach allows for more flexibility around reconstitution, thus reducing unnecessary turnover. Historical turnover for the index hovers around 15%, better than most active funds and consistent with many index fund peers.
“The committee will step in when a stock far exceeds the upper market-cap limit, preventing the portfolio from drifting too far from its small-cap moniker. Some small-cap index funds may be required to hold stocks long after they’ve left small-cap territory because of a ridged rebalance schedule. The S&P SmallCap 600 Index can remove them once they get far too large, ensuring the portfolio remains representative of the market it tracks.
“Small companies tend to be more volatile than their larger counterparts but may offer greater upside potential. While their businesses may not yet be mature and stable, the growth potential of promising small-cap stocks can lift the entire segment. Diversifying across a broad selection of small stocks is sensible as it spreads risk yet allows a portfolio to benefit from the winners.”
Zachary Evens, Morningstar analyst
Read Morningstar’s full report on SPDR Portfolio S&P 600 Small Cap ETF.
Vanguard Small-Cap ETF
Active or Index? IndexMorningstar Category: Small BlendTop Three Sectors: Industrials (18%), Technology (15%), Financial Services (14%)
The first of three Vanguard funds among the top small-cap ETFs to buy, Vanguard Small-Cap ETF is the most diverse of the trio, featuring small-cap stocks across the value and growth spectrum.
“Vanguard Small Cap Index offers a well-diversified, low-turnover portfolio that is representative of the US small-cap market. These features coupled with a best-in-class fee make it one of the most compelling strategies in the small-blend Morningstar Category.
“The fund tracks the CRSP US Small Cap Index, which sweeps in all small-cap US stocks that meet its investability criteria. These criteria consider a stock’s market cap, liquidity, and float. They help ensure the index is representative of the opportunity set and easy to track. Vanguard managers also employ a “packeting” approach during rebalances. This makes it more difficult for stocks to enter or exit the portfolio, reducing turnover and the associated transaction costs, which can run high in the relatively illiquid small-cap market.
“The fund weights its holdings by market cap, an efficient approach that harnesses the market’s consensus opinion of each stock’s relative value. Stocks that grow in size take up a larger share of the portfolio, while smaller companies that may be struggling take on a less important role. Market-cap weighting also helps rein in turnover and promotes diversification.
“The fund’s sector allocations and style orientation usually mimic the category average, which helps translate the fund’s low fee into a distinct performance advantage.
“The small-cap market tends to be quite volatile, but that volatility can breed periods of exceptional performance, such as after market crashes. Small caps tend to fall faster than their larger peers but rebound faster. This fund’s low fee and turnover-conscious approach can help it capitalize on these periods of outperformance while controlling for unnecessary risk.”
Zachary Evens, Morningstar analyst
Read Morningstar’s full report on Vanguard Small-Cap ETF.
Vanguard Small-Cap Growth ETF
Active or Index? IndexMorningstar Category: Small GrowthTop Three Sectors: Technology (25%), Industrials (18%), Healthcare (17%)
The only small-growth fund on our list of great small-cap ETFs to invest in, Vanguard Small-Cap Growth ETF (not surprisingly) holds a larger stake in technology stocks than others included here.
“Vanguard Small-Cap Growth Index provides a market-cap-weighted portfolio of the fastest-growing companies in the small-cap market. Its broad diversification and razor-thin expense ratio make this one of the best small-cap growth funds available.
“The fund tracks the CRSP US Small Cap Growth Index, which captures the faster-growing side of the small-cap market. Growth stocks tend to have high valuations because of investor sentiment around their superior growth prospects. These valuations represent the market’s consensus opinion, but they may not always be justified, making this a relatively volatile market segment. Small-cap stocks constitute most of the fund, but it holds some mid-cap stocks, which should temper volatility.
“Market-cap-weighting is efficient because it harnesses the market’s consensus opinion of each stock’s relative value. Stocks that grow in size take up a larger share of the portfolio, while smaller companies that may be struggling will have less importance. Generous buffers around the fund’s size and style constraints improve the breadth of the portfolio and help tame turnover.
“The portfolio is well-diversified. None of its 600 holdings garner more than 2% of assets, with the top 10 holdings usually representing less than 10% of the portfolio. Sector allocations resemble the Morningstar Category average with few exceptions. By most measures, the portfolio is similarly situated to the category and enables its low fee to carve a durable performance advantage.”
Zachary Evens, Morningstar analyst
Read Morningstar’s full report on Vanguard Small-Cap Growth ETF.
Vanguard Small-Cap Value ETF
Active or Index? IndexMorningstar Category: Small ValueTop Three Sectors: Financial Services (20%), Industrials (19%), Consumer Cyclical (13%)
Vanguard Small-Cap Value ETF rounds out our list of top small-cap ETFs to buy. It’s the second fund on the list focused on value stocks.
“Vanguard Small-Cap Value Index provides a market-cap-weighted portfolio of the cheapest companies in the small-cap market. Its broad diversification and razor-thin expense ratio make this one of the best small-cap value funds available.
“The fund tracks the CRSP US Small Cap Value Index, which captures the cheaper side of the small-cap market. Value stocks usually have low price/book and price/earnings ratios. Depressed valuations may be caused by slow earnings growth, poor fundamentals, or dim future prospects. While these may not be the most exciting firms, the low expectations implied by their low valuations should be easier to beat.
“Market-cap weighting is an efficient way to weight holdings because it harnesses the market’s consensus opinion of each stock’s relative value. Stocks that grow in size take up a larger share of the portfolio, while smaller companies that may be struggling will have less importance. Generous buffers around the fund’s size and style constraints improve the breadth of the portfolio and help tame turnover.
“The portfolio is well-diversified. None of its 800-plus holdings garner more than 1% of assets, with the top 10 holdings usually representing around 5% of the portfolio. Sector allocations largely resemble the Morningstar Category average. By most measures, the portfolio is similarly situated to the category and is an excellent representation of the market segment.”
Zachary Evens, Morningstar analyst
Read Morningstar’s full report on Vanguard Small-Cap Value ETF.
How to Find More Top ETFs to Buy
ETFs are often equated with low-cost indexing. However, the ETF marketplace has grown increasingly complicated. Some ETFs track a very narrow part of the market or pursue specific themes. Some ETFs invest based on a particular factor or a combination of them.
Use these Morningstar resources to help find the top ETFs to buy for your portfolio:
Learn about the types of exchange-traded funds, their costs, and how to invest in them by reading Morningstar’s Guide to ETF Investing.Find the highest-rated ETFs across all investment categories in The Best ETFs and How They Fit in Your Portfolio.Review Morningstar director of personal finance Christine Benz’s suggested ETF portfolios for those saving for or already in retirement, including Tax-Efficient Retirement-Saver Portfolios for ETF Investors, Tax-Deferred Retirement-Saver Portfolios for ETF Investors, ESG Tax-Deferred Retirement-Saver Portfolios for ETF Investors, Tax-Deferred Retirement-Bucket Portfolios for ETF Investors, and Tax-Deferred ESG Retirement-Bucket Portfolios for ETF Investors.Research ETFs based on your personal selection criteria by using our Morningstar Investor Screener. The tool, which is available to Morningstar Investor members, allows investors to screen ETFs based on various criteria, including asset class, Morningstar Category, Medalist Rating, and fee level.Visit Morningstar’s ETF page for the latest articles and videos from our ETF specialists.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.