This Key Trend May Power Small Cap Performance in 2026

Small-cap stocks are poised for a potential rebound, driven by surging global electricity demand from AI data centers, semiconductors, and EVs. American Century Investments suggests small-cap firms, acting as innovators in electrification-related sectors, could significantly outperform larger companies due to their concentrated business models. The Avantis International Small Cap Value ETF (AVDV), which has delivered a 38% YTD return, is highlighted as a potential investment vehicle to capitalize on this trend.

Analysis

Small-cap stocks, despite a challenging 2025, are projected for a potential rebound driven by a significant surge in global electricity demand. This demand is primarily fueled by the proliferation of AI-centric data centers, semiconductor manufacturing, electric vehicles (EVs), and increased electrification in buildings. This trend creates a fertile ground for smaller companies to innovate within the evolving energy landscape.

American Century Investments' analysis highlights that small-cap firms are uniquely positioned as innovators in electrification-related sectors, such as supply chain management, battery technology, and nuclear power. Senior portfolio managers Trevor Gurwich and Jim Shore suggest small caps could outperform large-cap counterparts due to their concentrated business models. A surge in demand within their niche areas can significantly impact their earnings, offering greater upside potential.

The Avantis International Small Cap Value ETF (AVDV) is presented as a compelling vehicle to capitalize on this trend. AVDV, which charges 36 basis points, focuses on small-cap firms meeting value standards based on fundamental criteria like shares outstanding and cash flow. The ETF has demonstrated strong performance, returning 38% year-to-date and outperforming its ETF Database Category average.

Key Decisions for Investors

• Consider increasing exposure to small-cap equities, particularly those aligned with the electrification theme, given the projected demand surge from AI and EVs.
• Evaluate ETFs like AVDV, which has demonstrated strong YTD performance (38%) and employs a value-oriented, fundamental approach to small-cap selection.
• Monitor global electricity demand indicators and policy developments in renewable energy and infrastructure, as these will be critical drivers for small-cap performance in this sector.