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U.S. Mar­ket broa­de­ning now or ne­ver?

Spotlight February 2026

Banner ETF Investment Insights

Welcome to the February edition of Xtrackers Spotlight!


This month, we explore if and how the long-anticipated U.S. market broadening trend is finally gaining traction and why U.S. small caps and S&P 500 equal-weight strategies may be well-positioned to benefit from the current late-cycle market environment.

U.S. market rotation gaining momentum as investors lean into domestic growth


Recent relative performance[1] and UCITS ETF flow-momentum[2] across major U.S. indices confirm a key theme from our latest Spotlights: US market leadership has started to broaden significantly since November (see charts 1 & 2 below).

After years of outsized returns from a narrow group of U.S. mega-cap tech names - driving S&P 500 concentration to multi-decade highs[3]- a clear rotation has been unfolding in recent months, accelerating further year-to-date[2]. Small- and mid-caps are now outperforming the previously favoured benchmarks[1]. Notably, both U.S. small caps and equal-weight UCITS ETF categories, have reversed their multi-billion-euro outflows in 2025 and attracted substantial inflows year-to-date (see chart 3).[2]

Such dynamics typically emerge when investors grow more confident in the resilience of economic growth and are willing to rotate beyond perceived “safe” market leaders toward more cyclical, higher beta, and domestically exposed segments. Against this backdrop, we see ample room for this allocation shift to continue through 2026.

Small caps and equal-weight are staging a come-back

Key U.S. indices’ performance comparison measured in USD

Source: DWS International GmbH, Bloomberg, as of 23.01.2026. Period: 31.12.2024 to 30.01.2026. Performance numbers in USD. Past performance is not a reliable indicator of future results.

 

Last year’s losers are this year’s winners 

Historical performance ranking (in USD)

Source: DWS International GmbH, Bloomberg, as of 23.01.2026. Period: 31.12.2025 to 30.01.2026. Past performance is not a reliable indicator of future returns. S&P 500 INDEX refers to SPX Index, S&P 500 Equal Weighted Index refers to SPW Index, Russell 2000 Index refers to RTY Index, Nasdaq-100 Index refers to NDX Index in Bloomberg.

What’s driving this shift?

 

The broadening in market leadership is thus far supported by three powerful forces which, especially in combination, have the potential to carry the rotation meaningfully further.

1: Ear­nings mo­men­tum conti­nues to broa­den

The earnings cycle has strengthened beyond the mega-caps. Q3 delivered above-trend sales and profit beats across the capitalisation spectrum, and early Q4 numbers are reinforcing that pattern[4]. As earnings breadth improves and the valuation discount to large caps normalises from historically wide levels, we believe that leadership can extend to previously lagging market segments[5].

2: The late-cycle ba­ck­drop is boos­ting mar­kets

US data continues to surprise to the upside, tightening credit spreads and pushing equities to new highs[6]. Policy signals from Washington ahead of the midterms - from tax incentives to deregulation efforts - are adding to expectations of a supportive domestic backdrop[6]. With investors still anticipating Fed cuts later this year[6], the environment remains favourable for small caps and other segments that historically benefit when inflation steadies and soft-landing dynamics take hold[7].

3: Di­ver­si­fi­ca­tion re­mains in fo­cus

Rising political uncertainty and ongoing geopolitical tensions are prompting investors to reassess the U.S.’s dominant share in global indices and the associated USD-exposure[8]. More balanced U.S. equity allocations – via equal-weight strategies or added small cap exposure – are increasingly viewed as sensible alternatives. Flow data reinforces this: year-to-date UCITS ETF inflows favour EM and EMEA over the U.S., while U.S. small caps and S&P 500 equal-weight strategies have seen a notable rebound in demand (see chart below).[2]

Monthly market NNA into U.S. small caps and S&P 500 equal-weight strategies

Source: DWS International GmbH, ETFBook.com data. Data as per end of 31.01.2026. Note: The mentioned flow numbers and the underlying analysis are based on an internal Xtrackers ETF database using ETFBook.com data, in which ETFs are allocated by Xtrackers to a classification based on the underlying exposure. There may be deviations compared to other sources.

Size matters: Why increased market breadth favours U.S. small caps and S&P 500 equal-weight


From a portfolio construction perspective, this transition is compelling. Equal‑weighted allocations naturally reduce concentration risk, introduce a value‑tilted profile, and still deliver a solid long‑term performance record.  They tend to benefit when market breadth increases, offering a more balanced expression of U.S. equities[3]. Meanwhile, small caps offer cyclical leverage, stronger ties to domestic growth, and structural diversification benefits, often representing sectors under-represented in cap-weighted indices[9].

Further interesting market segments to consider when playing this trend are value and cyclical sectors such as industrials, energy, and materials which typically also tend to outperform in this environment. 

In Summary

With market breadth improving and late-cycle dynamics strengthening, U.S. small caps and equal-weight strategies stand out as timely, compelling tools to diversify portfolios and capture the next leg of U.S. equity leadership.

For further insights and analysis on the historically high U.S. equity market concentration and diversification opportunities through greater market breadth, please look at our short research paper "Broadening in equities: now or never?". For further insights on U.S. small caps, please look at the September Spotlight. 

Risks to the view:


Systemic shocks—such as recessionary pressures or geopolitical dislocations—trigger broad risk-off sentiment, with equities typically bearing the brunt. Defensive sectors may underperform if inflation reaccelerates or central banks turn more hawkish. Market leadership can rotate quickly, especially if investor sentiment shifts toward cyclical or speculative growth.

Key Risks:

  • An investment in an Xtrackers ETF may not be suitable for all investors. Xtrackers UCITS ETFs are not capital protected, therefore investors should be prepared and able to sustain losses up to the total loss of the capital invested.
  • Investors should be aware that DWS Investments UK Limited, any of its parents or any of its or its parents subsidiaries or affiliates may from time to time own interests in the funds which may represent a significant amount or proportion of the overall investor holdings in the Fund. Investors should consider what possible impact such holdings, or any disposal thereof, may have on them.
  • Substantial fluctuations of the value of the investment are possible even over short periods of time.
  • Investments in Xtrackers UCITS ETFs involve numerous risks including but not limited to general market risks relating to the relevant underlying index, credit risks on the provider of index swaps utilised in the Xtrackers UCITS ETFs, possible delays in repayment, market fluctuations, counterparty risk, foreign exchange rate risks, interest rate risks, inflationary risks, liquidity risks, loss of income and principal invested and legal and regulatory risks.
  • Movements in exchange rates can impact the value of your investment. If the currency of your country of residence is different from the currency in which the underlying investments of the fund are made, the value of your investment may increase or decrease subject to movements in exchange rates.
  • Shares in Xtrackers UCITS ETFs which are purchased on the secondary market cannot usually be sold directly back to the fund. Investors must purchase and redeem such shares on the secondary market with the assistance of an intermediary (e.g. a market maker or a stock broker) and may incur fees for doing so (as further described in the prospectus). In addition, investors may pay more than the current net asset value of a share in a Xtrackers UCITS ETF when buying shares on the secondary market and may receive less than the current net asset value when selling such shares on the secondary market.

The value of an investment in Xtrackers ETFs may go down as well as up. Past performance does not predict future returns.

For further information regarding risk factors, please refer to the risk factors section of the relevant prospectus and the Key Investor Information Document.

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