Key Points
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While the S&P 500 and Nasdaq-100 have posted strong gains in 2026, the Russell 2000 small-cap index is surpassing both.
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Because its constituents primarily generate revenue within the United States, the Russell is better insulated from escalating geopolitical volatility.
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The Vanguard Russell 2000 ETF tracks this index, but it may encounter turbulence if the Federal Reserve raises interest rates next week as anticipated.
Although the S&P 500 (SNPINDEX: ^GSPC) and the technology-focused Nasdaq-100 consist of America’s top-tier companies, both have delivered solid returns of 12.7% and 17% respectively in 2026, as of the market close on Friday, Sept. 4.
However, the Russell 2000 index has achieved an even more impressive year-to-date gain of 20.2%. This index tracks roughly 2,000 of the smallest publicly traded companies in America. Since the majority of these companies generate revenue domestically, they are less vulnerable to headwinds such as the ongoing Middle East conflict compared to larger multinational corporations.
The Vanguard Russell 2000 ETF (NASDAQ: VTWO) is an exchange-traded fund designed to mirror the Russell 2000. It faces a pivotal moment on Sept. 15 and 16 during the U.S. Federal Reserve’s upcoming policy meeting. As the probability of an interest rate hike grows, small American companies are likely to be more sensitive to such policy adjustments than their larger counterparts.
Image source: Getty Images.
Small Caps Have Enjoyed Favorable Conditions in 2026
Both the S&P 500 and the Russell 2000 encompass companies from 11 economic sectors, making them highly diversified. However, technology alone accounts for over one-third of the S&P’s total value, whereas the Russell maintains a more balanced composition. The five largest sectors by weight within the Vanguard Russell 2000 ETF are:
- Healthcare: 19.8%
- Financials: 18.9%
- Industrials: 16%
- Consumer discretionary: 11.8%
- Technology: 10.8%
Furthermore, the top five holdings in the Vanguard ETF constitute merely 1.67% of its portfolio, meaning its performance does not rely on a handful of stocks. This is not the case for the S&P or the Nasdaq-100, which are highly top-heavy.
Data source: Vanguard. Portfolio weightings are accurate as of July 31, 2026, and are subject to change.
Despite receiving less attention than their larger counterparts, these stocks possess significant potential. For instance, Moog stock has surged nearly 50% in 2026 due to robust financial results driven by its space and defense operations. Hut 8 stock has skyrocketed 82% this year after securing billions of dollars in leases for its data center campuses, which are optimized for high-performance artificial intelligence (AI) chips.
Additionally, Viasat stock has climbed over 100% as investors continue to favor suppliers of satellite systems following the blockbuster June IPO of Elon Musk’s Space Exploration Technologies company.
Many Russell 2000 companies share a common trait: domestic operations. By generating most of their revenue within the U.S., they are insulated from disruptive global geopolitical issues. They are also benefiting from favorable government policies. For example, the Trump administration continues to impose broad-based tariffs on imported goods, enhancing the competitiveness of American companies against foreign entities. The administration is also reducing regulations to lower the cost of doing business for domestic enterprises.
The Fed Could Throw a Wrench in the Works Next Week
Although the Vanguard Russell 2000 ETF is outperforming the S&P 500 and the Nasdaq-100 this year, it typically underperforms over the long term due to its lack of exposure to America’s largest tech giants, which have become earnings powerhouses.
An investor who purchased the ETF a decade ago would currently be sitting on a respectable 139% return, but they would have achieved significantly higher returns of 254% in the S&P and 515% in the Nasdaq.
^NDX data by YCharts
The Federal Reserve could once again put the Russell on the back foot when it convenes for its September policy meeting next week, particularly as it attempts to curb elevated inflation. According to the CME Group‘s FedWatch tool, which calculates the probability of interest rate moves by analyzing the 30-day fed funds futures market, Wall Street anticipates a 59% chance that the central bank will raise rates.
Goldman Sachs reports that approximately 32% of Russell 2000 companies carry floating rate debt, compared to just 6% of S&P 500 companies. Consequently, an interest rate hike would present a severe headwind for small-cap earnings, potentially bringing the Russell’s recent outperformance to an abrupt end.
As a result, investors should think carefully before buying into small caps right now, and those with a high degree of exposure might want to consider taking some profits off the table.