This Key Trend May Power Small Cap Performance in 2026

Small cap stocks have had a complicated 2025. In certain segments, they have performed well, but writ large, they’ve struggled. That may be poised to change, however, in the months ahead. One powerful trend could boost small cap performance in the new year, with certain small cap ETFs poised to help get the most out of a potential shift for the category. 

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That trend? Global electricity demand. Demand is rising precipitously as more and more AI-centric data centers come online. Not only AI, but also semiconductors, EVs, and even buildings themselves are driving that demand higher and higher. That electrification creates numerous opportunities for small caps to shine.

Small Cap Performance Outlook Next Year

Recent analysis by American Century Investments explored which small cap areas may benefit most from global electrification. Smaller companies can often play the innovator role in the categories, whether that’s supply chain management or battery technology, or something in between. In nuclear power, for example, an area that had been relatively dormant compared to other renewables, small cap innovators could provide some exciting investment opportunities.

The report’s authors, senior portfolio manager Trevor Gurwich and senior client portfolio manager Jim Shore, suggest that small caps performance may see more upside than their large cap counterparts. 

“Compared to a larger company with several business lines, a typical small-cap firm generally concentrates on just one or two areas,” they wrote. “Therefore, a surge in demand in one of these areas can significantly impact the smaller company’s earnings.”

For those intrigued by the prospect of small cap performance, then, it may be worth considering small cap ETF options. The Avantis International Small Cap Value ETF (AVDV) may offer a strong candidate for inclusion in a portfolio. Charging 36 basis points (bps), the strategy invests in small cap firms meeting value standards. AVDV can lean on fundamental criteria like shares outstanding and cash flow to identify potential investments. 

That approach has helped the ETF return 38% YTD, per ETF Database data. That performance beat the fund’s ETF Database Category average in that time frame. Taken together, an ETF like AVDV could stand out should small cap performance rise in tandem with red hot electricity demand.

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