Betashares investment strategist, Tom Wickenden says 'the great rotation' into small-cap shares has begun.
Wickenden points out that 2025 was the first year since 2020 that ASX small-cap shares outperformed the rest of the market.
The S&P/ASX Small Ords Index (ASX: XSO), which tracks companies ranked 101 to 300 by market cap, delivered a total return (capital growth plus dividends) of 24.96% last year.
By comparison, the S&P/ASX All Ords Index (ASX: XAO) delivered total returns of 10.56%.
Small-cap shares typically have market caps between a few hundred million dollars and $2 billion.
Wickenden said:
Following years of large cap earnings stability and pricing power during the higher-than-normal interest rate environment, 2025 gave way to a rate cutting cycle supporting mid and small caps.
Lower interest rates reduce smaller companies' debt servicing costs and boost their earnings potential.
Wickenden said:
Mid and small caps in Australia also reported much stronger earnings growth throughout 2025, further driving the performance turnaround.
Lower funding costs and easing input pressures helped to lift margins and free cash flow across these segments.
Wickenden points to the Betashares Australian Small Companies Select ETF (ASX: SMLL) as an example of the trend.
SMLL ETF delivered a total return of 36.39% last year. It was the second best-performing ASX ETF holding Aussie shares in 2025.
Here are three ASX exchange-traded funds (ETFs) that provide exposure to small-cap shares both on the ASX and overseas exchanges.
Betashares Australian Small Companies Select ETF (ASX: SMLL)
This ASX-focused ETF seeks to track the returns of the Nasdaq Australia Small Cap Select Index before costs.
Betashares explains the ETF's strategy:
SMLL invests in a portfolio of ASX-listed companies that are generally within the 91-350 largest by free float market capitalisation. The portfolio will typically consist of 50-100 securities.
SMLL's index uses screens that aim to identify companies with positive earnings and a strong ability to service debt.
Relative valuation metrics, price momentum and liquidity are also evaluated as part of the selection process.
ASX gold stocks dominate the ETF's list of top holdings.
There's Perseus Mining Ltd (ASX: PRU) shares at 6.1%, Westgold Resources Ltd (ASX: WGX) 4.8%, Genesis Minerals Ltd (ASX: GMD) 4.6%, Vault Minerals Ltd (ASX: VAU) 4.4%, Capricorn Metals Ltd (ASX: CMM) 4%, and Ramelius Resources Ltd (ASX: RMS) 3.9%.
Over the past five years, SMLL ETF has delivered an average annual total return of 9.73% after fees.
Vanguard MSCI International Small Companies Index ETF (ASX: VISM)
VISM ETF seeks to track the MSCI World ex-Australia Small Cap Index (with net dividends reinvested) in Australian dollars before fees.
This ASX ETF gives investors access to more than 4,000 smaller companies operating in more than 20 developed countries.
The top holdings are flash memory designer and manufacturer Sandisk Corp (NASDAQ: SNDK) 0.82%, US laser and photonics technologies developer, Coherent Corp (NYSE: COHR) 0.39%, and aircraft engine leasing operator, FTAI Aviation Ltd (NASDAQ: FTAI) 0.29%.
VISM ETF has delivered an average annual total return of 9.9% after fees over the past five years.
VanEck MSCI International Small Companies Quality ETF (ASX: QSML)
QSML ETF seeks to mirror the performance of the MSCI World ex Australia Small Cap Quality 150 Index before costs.
This provides exposure to a diversified portfolio of 150 high quality, small-cap companies in developed countries outside Australia.
Stocks are selected on three key fundamentals: return on equity (ROE); earnings stability; and low financial leverage.
The top holdings are US aerospace industrial company, Curtiss-Wright Corp (NYSE: CW) 1.9%, precious metals royalties company, Royal Gold Inc (NASDAQ: RGLD) 1.8%, and US convenience store operator, Casey's General Stores Inc (NASDAQ: CASY) 1.65%.
QSML ETF began trading in March 2021.
Over the past three years, the ASX ETF has produced an average annual total return of 14.87% after fees.
The post 3 ASX ETFs capitalising on 'the great rotation' into small-caps appeared first on The Motley Fool Australia.
Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Coherent and Curtiss-Wright. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Casey's General Stores. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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