This Small-Cap ETF Is Outperforming QQQ -- Is It Still a Good Buy?

The past few years of the U.S. stock market have been dominated by a few highly influential large-cap stocks, like the Magnificent Seven and the giants of the artificial intelligence (AI) boom. But big companies aren't the only way to invest.

Small-cap stocks are making a comeback in 2026. So far, the iShares Russell 2000 Small-Cap ETF(NYSEMKT: IWM) has delivered a total return (by net asset value) of 18.22% year to date, outperforming the tech-heavy Invesco QQQ ETF(NASDAQ: QQQ) (known as "the Q's"), which has returned 17.57%. The iShares small-cap ETF also outperformed QQQ in the past year, with a total return of 41.75%:

IWM Total Return Level data by YCharts

It might sound surprising that smaller companies are delivering bigger returns than the 100 biggest tech companies. In the long run, the Q's have strongly outperformed small caps. But could this recent trend make small-cap stocks a better choice for the future?

Let's see why you might want to include the iShares Russell 2000 Small-Cap ETF in your portfolio.

Image source: Getty Images.

IWM vs. QQQ: Head-to-head comparison

These two exchange-traded funds (ETFs) offer very different portfolios and investment approaches. Here's a quick breakdown of the high-level metrics:

Data sources: iShares, Invesco, Yahoo! Finance.

The Invesco QQQ ETF has strongly outperformed the iShares fund over the past 10 years, with 21.8% annualized returns. But the iShares Russell 2000 ETF might offer more intriguing growth potential for the future -- its P/E ratio is 20.22, representing about a 37% discount compared to QQQ.

It's no surprise that QQQ, which tracks the tech-heavy Nasdaq-100 index, is loaded with tech names: they are 66.9% of its holdings. The iShares Russell 2000 ETF is more diversified, not only in terms of the sheer number of stocks, but in the breadth of sectors represented. Buying the iShares Russell 2000 ETF could help you put your money to work in parts of the economy that might have been overlooked by artificial intelligence-focused investors.

Why small-cap stocks are doing well

Small-cap stocks are rallying because the companies are growing their earnings. According to February research from T. Rowe Price, U.S. small-cap stocks are "experiencing a renaissance" driven by better earnings -- small-cap earnings started rapidly improving toward the end of 2025.

The research also suggested that small caps are benefiting in 2026 from a few favorable trends, like a stronger regional banking environment, fiscal stimulus from the new federal tax law, less tariff uncertainty, and AI benefits beginning to broaden to smaller companies -- not just major tech names.

The T. Rowe Price research also said that "an improving fundamental backdrop provides a durable foundation for small-cap performance going forward." No matter what happens next with the most high-profile names in the tech sector, smaller companies could be in a good position to keep growing. If these trends continue, the iShares Russell 2000 ETF could be a good buying opportunity.

Why buy IWM instead of QQQ

It's hard to bet against the Qs. But if you're worried that tech stocks are overvalued, want to diversify away from a possible AI bubble, or if you believe that the U.S. stock market has gotten too top-heavy with tech stocks and you want to invest in other opportunities, the iShares Russell 2000 ETF could be a good buy.

And even if you don't want to buy this fund as a defensive move against a tech downturn, it could also be a way to take a bullish position on the future of AI. If you believe that smaller companies are poised to benefit from productivity gains from AI, then buying today's small caps might let you own the biggest companies of the future.

Either way, the iShares Russell 2000 ETF is a well-diversified, low-cost index fund with strong momentum and significant upside. This fund is one of the best small-cap ETFs, and could be worth adding to your portfolio.