The iShares Russell 2000 ETF (IWM) gives you broad, low-cost exposure to ~2,000 U.S. small caps in a single trade. It tracks the Russell 2000 Index and charges a 0.19% expense ratio. As of mid-August 2025, BlackRock lists its P/E around 18 and P/B around 1.9, squarely in “reasonable” territory after several choppy years for the asset class.

The macro setup: cuts in sight, growth still okay

Markets are still pricing a September rate cut—most likely 25 bps—though hotter July PPI trimmed hopes for a larger move. That keeps the easing cycle on the table, just with less urgency. In other words: a glidepath to lower policy rates is intact.

Why does that matter for IWM? Small caps are structurally more rate-sensitive than mega caps. Research shows Russell-2000 companies rely more on floating-rate/short-term debt, so changes in borrowing costs hit them faster—on the way up and on the way down. Estimates peg ~45% of small-cap debt as floating (vs. ~9% for the S&P 500); other work notes roughly a third of small-cap debt is short-term and floating. If the Fed is easing, that sensitivity becomes a tailwind.

History rhymes: small caps often outperform after cuts

Looking across prior easing cycles, multiple studies (from asset managers and strategists) find small caps tend to beat large caps 6–18 months after the first rate cut, even as all equities usually do well. None of this guarantees the future, but the pattern is notable.

Tom Lee’s view: the rotation case

Fundstrat’s Tom Lee has been one of Wall Street’s loudest voices arguing that small caps should lead in a rate-cut environment. In 2024 he flagged the Russell 2000 for potentially outsized gains as policy shifted; through 2025 he’s reiterated that a broadening of market leadership—with small/mid caps participating—remains his base case into and after Fed easing.

Positioning/valuation check

After years of lagging mega caps—S&P 500 outperformed the Russell 2000 by ~69% since early 2021—small caps trade at a relative discount. Several street pieces in 2025 explicitly highlight small and mid caps as better value versus stretched large-cap benchmarks. That gap sets the stage for catch-up if the cost of capital falls.

Within IWM, sector weights lean toward financials, industrials, health care, and tech, all areas that can benefit when credit loosens and growth stabilizes. As of June 30, 2025, those were the top slices of the index.

Near-term catalysts

• Policy inflection: A September cut would confirm an easing cycle—historically constructive for small caps.
• Breadth improvement: We’ve already seen episodes (e.g., July) where small-cap indexes outpaced the S&P as breadth widened.
• Valuation re-rating: If large-cap multiples remain rich, incremental flows may hunt for value further down the cap spectrum.

Risks to respect

• Sticky inflation / fewer cuts: Hotter inflation (e.g., July PPI) could slow the pace of easing; small caps would feel that quickly.
• Refinancing wall: Small caps have more debt maturing sooner, making them sensitive if credit spreads widen.
• Index quirks: The Russell 2000 includes a higher share of unprofitable firms than large-cap indexes. Stock picking can beat the blanket, but IWM’s breadth also diversifies single-name risk.

Bottom line: why IWM works as a long-term hold now

If your goal is to own the small-cap factor through the next rate cycle, IWM is a straightforward core vehicle: broad exposure, tight tracking, and a low fee (0.19%). Given the Fed’s likely pivot toward lower policy rates and the historical tendency for small caps to lead after cuts—an outlook echoed by Tom Lee—IWM looks well-positioned as a long-term hold into easing, recognizing the usual small-cap volatility along the way.