Jasmine Birtles
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The Best Small Cap ETFs to Buy in 2025
Ruby Layram
23rd May 2025
Looking for an investment with big growth potential in 2025? Small-cap ETFs might just be your answer. They’re often overlooked in favour of bigger, shinier companies, but that’s exactly why they’re so exciting!
In this article, we’ll explain what small-cap ETFs are, why they could be a great addition to your portfolio this year, the pros and cons, how to invest, and a list of the best ones to consider in 2025.
What Are Small Cap ETFs?
A small-cap ETF is a type of exchange-traded fund that tracks a group of small-cap companies – that is, businesses with a relatively low market capitalisation. While definitions vary, small caps generally have a market value between $300 million and $2 billion.
These companies are often at earlier stages of growth and innovation. By investing in a small-cap ETF, you’re essentially placing a bet on the future stars of the stock market… without having to pick individual companies yourself.
Why Small Cap ETFs Are an Attractive Investment in 2025
There’s a growing sense among analysts that small-cap stocks are set for a comeback. After lagging behind their larger counterparts over the past few years, these nimble companies could be well positioned to outperform as interest rates stabilise and economic optimism grows.
Here’s why 2025 might be a smart time to consider them:
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Growth potential: Smaller companies tend to grow faster than large firms, especially in the early stages of recovery or expansion.
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Undervalued opportunities: Many small caps are still trading at attractive prices, making them relatively cheap.
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Diversification: Small-cap ETFs can balance out a portfolio dominated by large-cap or international stocks.
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Local economic recovery: If your ETF includes domestic small caps, it may benefit from improving local conditions.
The Pros and Cons of Investing in Small-Cap ETFs
Investing in small cap ETFs is a good way to gain exposure to stocks that have huge growth potential. However, its important to weigh up both the pros and cons of investing before you make a decisions.
Pros:
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Higher return potential: Historically, small caps have delivered strong long-term performance.
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Access to up-and-coming companies: Without having to choose individual winners.
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Diversification: ETFs spread your risk across a basket of stocks.
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Lower cost than actively managed funds: Most small-cap ETFs have relatively low fees.
Cons:
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More volatility: Small-cap stocks tend to swing more dramatically in price.
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Less liquidity: These companies may be harder to buy and sell quickly.
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Market sensitivity: Small caps are often more vulnerable to economic downturns.
The Best Small-Cap ETFs to Buy in 2025
If you’re thinking about adding a small-cap ETF to your portfolio, here are some of the top picks for 2025:
1. iShares Russell 2000 ETF (IWM)
This popular fund tracks the performance of 2,000 U.S. small-cap companies. It’s ideal for those who want wide exposure to the U.S. small-cap market without picking individual stocks.
2. iShares Core S&P Small-Cap ETF (IJR)
Tracking the S&P SmallCap 600 Index, IJR focuses on U.S. companies with solid financials. It’s known for being cost-effective and highly liquid, a good option for first-time small-cap investors.
3. Vanguard Small-Cap ETF (VB)
Offering broad exposure to U.S. small-cap stocks through the CRSP US Small Cap Index, VB is a reliable, low-fee option from one of the most trusted names in investing.
4. Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)
Want international exposure? This ETF invests in small-cap companies outside the U.S., including Europe, Asia, and emerging markets. Great for diversifying beyond domestic borders.
5. Invesco S&P SmallCap Value with Momentum ETF (XSVM)
This fund targets U.S. small caps that score well on value and momentum. It’s for investors who like a more active twist on passive investing and are looking for performance-focused picks.
6. Dimensional U.S. Small Cap ETF (DFAS)
DFAS uses a systematic, factor-based approach, selecting U.S. small caps based on size, value, and profitability. It’s a smart choice for those who prefer a structured investment strategy.
7. Avantis U.S. Small Cap Value ETF (AVUV)
Targeting value stocks in the small-cap space, AVUV looks for companies with strong fundamentals and good valuations. A strong performer for those who believe in value investing.
How to Invest in Small Cap ETFs as a UK Investor
If you’re based in the UK, investing in small-cap ETFs, especially those listed in the U.S., is easier than you might think.
Here’s how to get started:
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Open a stocks and shares ISA or SIPP: Many UK investment platforms offer these tax-efficient wrappers, and they usually provide access to global ETFs.
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Use a reputable broker: Investment platforms like Invest Engine, Freetrade, and Interactive Investor all offer access to U.S. and international ETFs.
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Check fees and FX charges: Some brokers charge currency conversion fees when buying U.S. ETFs, so keep an eye out.
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Consider tax implications: U.S.-listed ETFs may be subject to withholding tax on dividends. You can reduce this by filling out a W-8BEN form via your broker.
Final Thoughts
Small-cap ETFs offer a great way to tap into the growth potential of tomorrow’s market leaders – all with the convenience of one investment. As we move through 2025, they’re shaping up to be one of the more interesting asset classes to watch, especially as market conditions improve.
Like all investments, they come with risks. But if you’ve got a long-term outlook and a bit of appetite for volatility, small-cap ETFs could be a smart addition to your portfolio this year.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here, including opinions, commentary, suggestions or strategies, are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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