Small-cap stocks and the related ETFs are showing signs of life to close out 2025. The Russell 2000 and S&P SmallCap 600 indexes both are higher by more than 1% over the past three months. That could signal opportunity is beckoning with smaller stocks and ETFs such as the WisdomTree US Smallcap Quality Dividend Growth Fund (DGRS).
DGRS merits placement on investors’ 2026 small-cap shopping lists. After all, the ETF outperformed the S&P SmallCap 600 Index over the past three years while displaying slightly less annualized volatility.
DGRS’s quality leanings and favorable volatility traits are durable in any environment. That said, they could take on added importance at a time when the U.S. economy is flashing mixed signals. For example, the labor market could use a positive boost — notable because small-caps are intimately tied to domestic goings on.
Fed Assistance Could Boost DGRS in 2026
The aforementioned labor market weakness could lead the Federal Reserve to continue lowering interest rates next year. On that note, some good news emerged Thursday. The delayed reading of the November Consumer Price Index (CPI) showed inflation cooling to 2.7% — a four-year low.
The Fed taking steps to bolster the economy is pertinent in any regard, but particularly so when evaluating DGRS. The ETF allocates more than a quarter of its weight to financial services stocks — its largest sector weight.
“When the outlook for the economy perks up, banks see higher demand for financing and corporate transactions and money managers see higher assets under management because asset prices rise,” reported Jacob Sonenshine for Barron’s.
History on Small-Caps’ Side
History could also portend 2026 upside for the $352 million DGRS. Fed easing, which could accelerate when Jerome Powell departs the central bank, often acts as a catalyst for small-cap equities.
“Since 1990, small-caps have outperformed large-caps on average in the one, three, six, 12, and 24 months after the Federal Reserve (the Fed) has cut interest rates,” according to Merrill. “Other factors that could contribute to their change in fortune are today’s increase in mergers and acquisitions activity and more accommodating regulatory policies.”
Perhaps furthering the ETF’s case: Even with recent small-cap strength, the asset class remains attractively valued relative to larger stocks. DGRS pays monthly dividends.
“The S&P 600 trades at just over 15 times aggregate earnings that analysts forecast for the index’s companies over the coming 12 months. That’s 30% below the S&P 500’s just over 22 times, a steeper discount versus the 16.3% average over the past decade,” according to Barron’s.
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