Small-cap tech stocks surge as investors chase AI spillovers

The AI trade has moved far beyond the familiar megacap names, and smaller U.S. technology stocks are suddenly catching the money. Investors have pushed $49.7 million into the Invesco S&P SmallCap Information Technology ETF so far this year after four straight years of outflows, a sharp sign that market attention is migrating down the capitalization ladder in search of cheaper AI exposure and less crowded winners.

The shift is showing up in performance. The S&P 600 small-cap tech index has gained almost 54% this year, far ahead of the 20.1% rise in the S&P 500 technology index. The gap is among the widest seen since before 1995, underscoring how aggressively traders have rotated into a part of the market that spent years trailing the largest chip and software companies. Oren Shiran, portfolio manager for the Lazard US Systematic Small Cap Equity ETF, said, “The AI trade has broadened quite materially.”

The appeal is not limited to software hopefuls. Investors are hunting for second- and third-order beneficiaries of the AI buildout, including chipmakers, data-center suppliers and network-equipment makers whose businesses can rise with the infrastructure spending behind the boom in large-cap semiconductors. LSEG data show smaller semiconductor companies are expected to post profit growth of nearly 40% in the second quarter, giving the rally a fundamental backdrop even as valuations run higher. The ETF’s recent holdings, including Viavi Solutions, Sanmina, FormFactor, Semtech, Viasat, Qorvo, Plexus, MaxLinear, Ralliant and Diodes, show how the trade has spread into electronics, networking and parts of the chip supply chain rather than staying concentrated in the biggest AI platforms.

Even so, the move carries clear risks. The fund tracks the S&P SmallCap 600 capped information technology index, a subset of the S&P SmallCap 600, and it is rebalanced and reconstituted quarterly. That structure gives investors a broad basket, but it also leaves them exposed to smaller companies that depend more heavily on debt financing and can be hit harder if bond yields stay elevated. The ETF’s year-to-date return of about 46.98% and one-year gain near 94.45% show how fast sentiment has changed, but they also raise the question of whether this is a durable rerating tied to revenue prospects or another late-stage burst of market hype.

The broader market backdrop suggests the rotation is not isolated. The Russell 2000 has climbed 16% since November as traders unwound crowded positions in the Nasdaq-100, a reminder that the AI story is now influencing flows well beyond the largest technology names. For now, the chase for spillover winners has made small-cap tech one of Wall Street’s hottest corners, even as investors debate how much of the advance reflects real earnings power versus momentum.