MW As small-cap stock indexes have hit records, this ETF has beaten them
By Philip van Doorn
A more selective approach to small-cap indexing has helped the Invesco S&P SmallCap 600 QVM multifactor ETF outperform broad indexes
Small-cap stock indexes have outperformed the S&P 500 so far in 2026 by a wide margin, and Nick Kalivas of Invesco believes smaller companies may see a bigger boost from declining fuel costs - assuming a peace deal between the U.S. and Iran holds up.
On Monday, small-cap U.S. stock indexes hit record highs. These indexes have underperformed the large-cap indexes over recent years, with the latter led by the technology giants that have soared. But so far in 2026, small-caps have outperformed the S&P 500, and the timing might still be good for investors to add exposure to this asset class.
Let's begin by pointing out that most small-cap funds are benchmarked to the Russell 2000 index RUT. This index has no selection criteria and includes hundreds of unprofitable companies. It is made up of the smallest 2,000 companies by market capitalization in the Russell 3000 Index RUA, which itself is designed to capture 98% of the market for publicly traded common stocks listed in the U.S.
But there is another useful small-cap benchmark, the S&P Small Cap 600 SML Index, which has several requirements for inclusion, such as four quarters of consecutive profits.
The Invesco S&P SmallCap 600 QVM multifactor ETF QVMS was launched on June 30, 2021. This exchange-traded fund's objective is to outperform the S&P Small Cap 600 Index by using several factors to cull 10% of the index's stocks and weight the remaining 540 stocks by market capitalization when the portfolio is rebalanced quarterly. This is an unusual approach for a factor ETF. Typically, these passively managed ETFs use factor analysis to select a much smaller number of stocks from an index.
QVMS tracks the S&P SmallCap 600 Quality, Value & Momentum Top 90% multifactor Index, which is quite a long name, but sums up the culling process. Each quarter, S&P Dow Jones Indices begins with the full S&P Small Cap 600 index and then assigns three factor scores to each company:
-- The quality score is based on a company's return on equity, level of debt and an "accruals ratio" of operating assets to its total assets. The accrual ratio is meant to measure how much of a company's earnings comes from actual cash flow.
-- The value score is based on a stock's ratios of book value to price, earnings to price and sales to price.
-- The momentum score reflects a stock's price movement over the previous 12 months with a risk adjustment for day-to-day price volatility.
The 10% of stocks in the S&P Small Cap 600 Index with the lowest combined scores are excluded, with the remaining 540 stocks weighted by market capitalization when the QVMS portfolio is reconstituted quarterly.
Here is how QVMS performed from inception on June 30, 2021, through Monday:
The Invesco S&P SmallCap 600 QVM multifactor ETF has outperformed the S&P Small Cap 600 Index and the Russell 2000 index from the ETF's launch on June 20, 2021, through June 15, 2026.
All investment and index performance figures in this article include reinvested dividends and, for ETFs, are net of expenses.
At first glance, the ETF's outperformance for this period of nearly five years may not seem remarkable. But it has actually beaten the indexes by a wide margin when considering that the two small-cap indexes have been relatively weak performers for this period, during which the S&P 500 SPX has returned 88.9%. The figures for the indexes don't reflect any management expenses.
When discussing this year's outperformance for small-cap stocks relative to large-caps, Nick Kalivas, Invesco's head of factor strategy for exchange-traded funds, told MarketWatch that the U.S. peace deal with Iran, which has already helped push down oil prices, can "accelerate the profitability recovery for the small-caps."
"It may be showtime for small-caps," Kalivas said, in part because of investors' concerns that hyperscalers, such as Microsoft $(MSFT)$, Meta Platforms (META) and Amazon (AMZN) are "going from asset-light to asset-heavy" as they raise money to spend on data infrastructure to support generative artificial intelligence technology. He also cited Oracle $(ORCL)$ as an example of a company growing its AI-related business quickly, but whose stock has been hammered as its infrastructure spending has increased. Oracle's stock was down slightly for 2026 through Monday. But through May, the stock was showing a year-to-date gain of 16.6.% So far in June, it has fallen 14.7%.
Read: Oracle's stock is seeing its worst run in a quarter-century as this key AI debate rages on
When discussing QVMS's methodology, Kalivas said the fund was designed to achieve better returns than the S&P Small Cap 600 Index, "with slightly less risk."
A different twist: This stock-market strategy has cheap exposure to AI and points to an advantage for closed-end funds
Two small-cap indexing approaches
QVMS has beaten both broad small-cap indexes since it was established, but that has been for a period of less than five years.
Over recent years, the Russell 2000 has outperformed the S&P Small Cap 600 Index. But over longer periods, the more selective approach has worked out better. Here is a comparison of total returns for the two indexes over various long periods through Monday:
Index 3 years 5 years 10 years 15-years 20 years 30 years
S&P Small Cap 600 52% 36% 190% 418% 531% 1,733%
Russell 2000 64% 37% 195% 367% 455% 1,147%
Source: FactSet
The Russell 2000 has been the stronger performer for the three-, five- and 10-year periods. But for the 15-, 20- and 30-year periods, the S&P Small Cap 600 Index has been the much better performer.
Performance of QVMS against peers
LSEG lists hundreds of ETFs as competitors to the Invesco S&P SmallCap 600 QVM multifactor ETF QVMS, but we can narrow down the list to two other ETFs that are benchmarked to the S&P Small Cap 600 Index.
LSEG calculates one-year returns and average annual returns for longer periods through the most recent month's end. Returns are net of annual expenses, which for QVMS is 0.15% of assets under management. That makes for annual expenses of $15 for a $10,000 investment.
Keeping in mind that QVMS is coming up on its five-year anniversary, the following comparison begins with two ETFs that track the S&P Small Cap 600 Index, sorted by 10-year average returns. Then, two that track the Russell 2000 and are also sorted by 10-year returns. Then the two peer funds are listed, sorted by five-year returns. These are the Overlay Shares Small Cap Equity ETF OVS, established in October 2019, and the ETC 6 Meridian Small Cap Equity ETF SIXS, launched in May 2020.
Vanguard Russell 2000 index ETF 1-year return 3-year avg. return 5-year avg. return 10-year avg. return Expense ratio Invesco S&P SmallCap 600 QVM Multi-factor ETF 33.0% 16.8% - - 0.15% State Street SPDR Portfolio S&P 600 Small Cap ETF 33.3% 16.4% 5.9% 11.3% 0.03% iShares Core S&P Small-Cap ETF 33.3% 16.3% 5.9% 10.7% 0.06% Vanguard Russell 2000 Index ETF 43.2% 20.3% 6.7% 11.3% 0.06% iShares Russell 2000 ETF 42.9% 20.1% 6.5% 11.1% 0.19% Overlay Shares Small Cap Equity ETF 38.7% 18.2% 6.3% - 0.83% ETC 6 Meridian Small Cap Equity ETF 19.3% 12.8% 3.8% - 0.52% Source: LSEG
Again, the Russell 2000 has outperformed the S&P Small Cap 600 Index for the one-, three-, and five-year periods, but on this performance table, you can see that for 10 years, the best performer has been the State Street SPDR Portfolio S&P 600 Small Cap ETF QVMS. And, since its inception, QVMS has outperformed all of these other funds, as outlined in the first chart above.
Click on the tickers for more about each stock, ETF or index.
Read: Tomi Kilgore's detailed guide to the information available on the MarketWatch quote page
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-Philip van Doorn
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June 16, 2026 07:31 ET (11:31 GMT)
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