Small-cap ETFs are attracting renewed investor attention after months of outflows, with market dynamics suggesting potential opportunities ahead, according to Matt Bartolini, global head of research strategist at State Street Investment Management.

Bartolini joined Nate Geraci on this week’s ETF Prime to discuss three investment themes for 2026: small-cap stocks, active ETFs, and portfolio resilience. After outflows in the first seven months of last year, small-caps have seen inflows in four of the last five months, according to Bartolini.

Read more: ETF Prime: Grading 2026 ETF Predictions

The shift comes as monetary and fiscal conditions favor smaller companies. Historically, small-caps outperform large-caps by 6% in the 12 months following Federal Reserve rate cuts, according to Bartolini. Lower borrowing costs help smaller firms with higher debt loads relative to larger corporations.

Valuation metrics support the case for small-caps. The asset class trades at a 12% discount to its pre-pandemic five-year average and sits 36% below large-caps on a relative basis, according to Bartolini. He recommends investors “pick up the beta exposure” rather than splitting between value and growth strategies.

Active ETF Growth Continues

Active ETFs collected a record $580 billion in 2025 while active mutual funds experienced $640 billion in outflows, according to Bartolini. Over the past decade, active ETFs gained $1.2 trillion in assets as active mutual funds lost nearly $4 trillion.

Fixed income managers delivered better results than equity managers last year. In 2025, 47% of active fixed income managers beat their benchmarks compared to just 32% of active equity managers, according to Bartolini. Active managers in major fixed income categories generated an average excess return of 34 basis points.

The case for diversification strengthened in 2025 as multiple asset classes delivered positive returns. Last year marked the first time since 2019 that stocks, bonds, and commodities all outperformed cash, according to Bartolini. Additionally, 76% of countries in the MSCI ACWI index outperformed the U.S., the highest percentage since 2009.

Bartolini highlighted the SPDR Bridgewater All Weather ETF (ALLW) as a diversification option, noting the fund had trading volume exceeding $10 million in 12 of the last 13 days.

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