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Market Analysis2026-02-09
Small Cap Rotation IWM Avuv
Capital flows from tech stocks into small-cap value stocks are accelerating. IWM has gained 16.8% on an annual basis, achieving performance close to large-caps, while market conditions are turning increasingly favorable for the value factor.
Admin
Early 2026 is bringing notable shifts to US equity markets. Capital that had been concentrated in large-cap growth stocks — particularly big tech — over the past several years is rapidly rotating into small-cap and value stocks. IWM (Russell 2000 ETF) has posted a solid 16.8% annual return at $265, marginally outpacing SPY's 15.6%. According to Reuters reporting, analysts suggest that as investors reposition into 'undervalued smaller companies,' small-caps — long laggards — are entering a re-rating phase.
The Case Behind the Small-Cap Rebound
Three key factors are driving the small-cap rebound. First, the valuation gap: IWM's P/E of 18.59x is significantly cheaper than SPY's 26.66x. Second, during economic expansion phases, small-cap revenue growth has begun to outpace large-caps. Third, expectations for rate cuts are acting as a tailwind for smaller companies that are more sensitive to borrowing costs. With $73.4 billion in assets under management spread across 1,951 holdings, IWM offers broad diversification that limits individual stock risk.
Small-Cap Value Strategy Through AVUV
Among small-cap ETFs, AVUV (Avantis U.S. Small Cap Value ETF) takes a more aggressive stance by focusing specifically on the value factor. It invests in 657 holdings, selectively targeting highly profitable small-cap value companies such as Fabrinet, Saia, and UFP Industries. With an expense ratio of 0.25%, it is cost-efficient, and from a factor investing perspective, it simultaneously pursues both the small-cap premium and the value premium. That said, since its volatility is higher than IWM, the typical guidance from asset allocation calculators is to keep it within 10–15% of the overall portfolio.
The Rotation from Large-Cap Growth to Value
Through 2025, growth stock investing centered on TQQQ and QQQ was dominant, but the tide is turning in 2026. As signals of broadening market participation strengthen, RSP (equal-weight S&P 500) is delivering performance close to SPY, and industrials and financials are catching up to technology. A performance reversal between VLUE (value factor ETF) and MTUM (momentum ETF) is also emerging, suggesting a full-fledged style rotation may be underway. Investors heavily concentrated in TQQQ may benefit from diversifying a portion into small-cap value for better risk management.
Setting Small-Cap Allocation and Rebalancing
In a well-balanced portfolio, a 15–25% allocation to small-caps is generally appropriate. Because VTI tracks the total market by market-cap weight, small-caps represent only about 10% of its holdings; adding IWM or VTWO (Vanguard Russell 2000) separately allows investors to deliberately tilt toward small-caps. Using a rebalancing calculator makes it easy to spot the gap between current and target small-cap weights at a glance. Rebalancing quarterly — but only when the allocation drift exceeds 5% — is a threshold-based approach that helps minimize transaction costs.
Conclusion
The small-cap value rotation may be more than a short-term trend — it could be signaling a structural shift. With valuation appeal and economic expansion converging, IWM and AVUV are being rediscovered as core tools for portfolio diversification. If your portfolio is tilted heavily toward large-cap growth, now is the right time to use an asset allocation calculator to review your small-cap exposure and execute a rebalancing.
