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With Small-Caps Rallying, Consider This Income-Rich ETF

BY | ETF Database
8:48 am ET 02/02/26 | 49 VIEWS
One month into 2026, one of the most widely discussed trends is the impressive rebound of domestic small-cap stocks. Sure, the upside delivered to start the year by ETFs tracking the Russell 2000 and S&P SmallCap 600 indexes, among others, is worth taking with a grain of salt. One month of performance from small-caps is just that: One month.On the other hand, the recent strength displayed by smaller stocks shouldn’t be ignored. Still, some investors may want equity income to go along with small-cap exposure. Enter the NEOS Russell 2000 High Income ETF (IWMI ). IWMI sports a tempting distribution rate of 14.47%, which truly stands out relative to the Russell 2000’s paltry dividend yield of 0.97%, as of Jan. 30.IWMI Worth Investigating TodayFor income-hungry investors, IWMI’s distribution is a compelling selling point, but it’s also worth remembering that NEOS’s covered call ETFs have a knack for delivering decent amounts of upside relative to rival products. That shouldn’t be overlooked at a time when some market observers believe more upside is in store for small-caps. “According to our valuations, we think they have further to run. Looking forward, our economics team forecasts at least two more cuts to the fed-funds rate this year and long-term interest rates to fall further,” says Morningstar’s Dave Sekera. “Plus, the AI buildout boom has spurred faster-than-expected economic growth. Historically, small-cap stocks perform best when the Fed is easing monetary policy, long-term interest rates are declining, and the rate of economic growth is reaccelerating.” Regarding small-caps’ well-documented interest rate sensitivity, the Federal Reserve held rates steady in January, potentially hastening the end of Jerome Powell’s time leading the central bank. Said another way, President Trump wants Powell gone and will replace him with a more dovish Fed chair. Politics aside, should that scenario materialize, it could benefit small-cap equities and ETFs such as IWMI. Interest rates are especially important when evaluating Russell 2000-linked ETFs. Owing in part to the breadth of that gauge, a significant percentage of its components aren’t profitable. They need to borrow capital to fund growth plans. Obviously, lower rates mean more favorable borrowing terms. These are good for any company, let alone smaller firms struggling to reach profitability. For more news, information, and analysis, visit the Tax Efficient Income Content Hub.

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