Small-Cap ETFs: A Canadian Investor's Guide to U.S. Exposure
Why U.S. small caps are outperforming this year, and three Canadian ETFs offering exposure to the asset class.
Looking across the market-capitalization spectrum of U.S. equities thus far in the year, the performance of U.S. small-cap equities is particularly notable, as the Russell 2000 Index has outperformed its mid-cap (i.e. Russell Midcap Index) and large-cap (i.e. Russell 1000 Index) peers.
Developments Shaping Small Cap Equities Performance
Unlike last year, when the shock from liberation day tariffs significantly affected small-cap equities (relative to large-cap and mid-cap), this year’s drawdown was comparatively mild, allowing the asset class to maintain its momentum. More recently, given the rotation away from mega-cap hyperscalers due to exhausted valuations and massive capital expenditure requirements for ongoing AI development, smaller companies within the AI ecosystem have caught investors' attention, as these firms are poised to benefit from the buildout of AI infrastructure.
From an economic standpoint, the U.S. economy's resilience continues to bolster investor sentiment. Growth has not collapsed. Consumers have not fully retrenched. Labour market conditions have not deteriorated sufficiently to trigger a broad recession trade. That resilience shifts the investment case for small caps, prompting investors to ask whether they had become too pessimistic about domestically exposed companies, especially those with operating leverage to a still-expanding U.S. economy. These supportive economic indicators, along with the desire to avoid overexposure to the ‘AI Trade,’ have led investors to pivot towards smaller companies perceived as more sensitive to domestic economic improvements.
Investing in U.S. Small Cap Equities via ETF
For Canadian investors interested in gaining exposure to U.S. small-cap equities, the iShares U.S. Small Cap Index ETF (Ticker: XSU), iShares S&P U.S. Small-Cap Index ETF (Ticker: XSMC/XSMH), and BMO S&P US Small Cap Index ETF (Ticker: ZSML/ZSML.U/ZSML.F) offer exposure to the asset class; however, with a nuanced difference.
Both the iShares S&P U.S. Small-Cap Index ETF and the BMO S&P US Small Cap Index ETF replicate the performance of the S&P SmallCap 600® Index. Conversely, the iShares U.S. Small Cap Index ETF replicates the performance of the Russell 2000® Index.
This article was written on August 9th, 2026. Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
