Small Caps, Big Comeback? ETFs Betting On America's Underdogs As Tax Tweaks And Technicals Align

Author: Chandrima Sanyal | July 25, 2025 12:51pm

Having spent most of 2025 in the shadow of their big-cap counterparts, U.S. small-cap stocks might finally be ready to re-enter the limelight. A combination of friendly policy shifts, overlooked fundamentals, and bullish technical signals is encouraging investors to take a closer look at this long-overlooked asset class, and ETFs are the vehicle of choice for riding the revival.

From the iShares Russell 2000 ETF (NYSE:IWM) to deep-value and innovation-themed plays such as the Acquirers Deep Value ETF (NYSE:DEEP) and Invesco Nasdaq Future Gen 200 ETF (NASDAQ:QQQS), small-cap ETFs experienced a modest uptick in recent weeks. But is this merely a blip, or the start of something greater?

IWM ETF's momentum continues. Track it now here.

Tax Perks And Tech Charts Revive Small Caps

Small caps are gaining increasing investor interest as a combination of strong valuations, favorable tax policy, and improved technicals is starting to alter the narrative. According to on LPL Financial’s Jeff Buchbinder, the Russell 2000’s depressed price-to-book ratio of 2.03 compared to the Russell 1000’s 5.35 points to a stark valuation divide, and the just-signed into law “One Big Beautiful Bill Act” provides tempting tax breaks for smaller companies—such as upfront R&D deductions and 100% bonus depreciation—that would dramatically enhance profitability.

Technically, the Russell 2000 has risen by nearly 30% since its April troughs, indicating a bullish reversal, although it remains in a long-term relative downtrend. Earnings are also catching up, with small caps leading large caps in year-over-year profit growth, although they still lag on beat ratios. Add to that favorable credit conditions and a recovering U.S. dollar, which benefits domestic small caps, and the environment may be ripe for these underdogs to punch above their weight.

ETFs In Focus: How to Ride the Small-Cap Wave

ETF	Focus	1-Month Performance
iShares Russell 2000 ETF	Broad U.S. small caps	+5.3%
Pacer US Small Cap Cash Cows ETF (BATS:CALF)	High FCF-generating small caps	+5.2%
Acquirers Small & Micro Deep Value ETF (NYSE:DEEP)	Deep-value U.S. small caps	+5.4%
Invesco Nasdaq Future Gen 200 ETF	Innovative small-cap growth names	+8.4%
Sprott Junior Gold Miners ETF (NYSE:SGDJ)	Small-cap gold miners	+4%

• IWM is still the standard, with investors having wide exposure to the Russell 2000.
• CALF concentrates on high free cash flow, a key shock absorber in a high-interest-rate environment.
• DEEP is every contrarian’s dream, full of cheap small/micro-cap names.
• QQQS goes all-in on the innovation theme, which is great if you believe that software R&D expensing will ignite a fire under tech stocks.
• SGDJ provides a hard-asset shelter, particularly if inflation returns or gold prices rise again.

Bottom Line: Don’t Sleep On The Small Stuff

Small caps are still lagging behind on the year, with the Russell 2000 up only 0.76% YTD compared to the S&P 500’s 8.8% advancement. But the momentum might be shifting. With tax reform, earnings momentum, and technical trends all in sync, ETFs might be the agile ticket to wager on America’s grittiest stocks.

In a market increasingly dominated by mega-cap narratives, small caps offer something rare: underappreciated potential, and the ETFs to match.

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Photo: NicoElNino via Shutterstock

Posted In: CALF DEEP IWM QQQS SGDJ