By S, JHA
ICICI Direct says smallcap ETFs could be a core portfolio allocation as Smallcap 250 rebounds and long-term returns outperform Nifty 50.
Mumbai, May 27, 2026 — Smallcap stocks, long viewed as a high-risk but high-reward corner of the market, may be entering a new phase of maturity and strategic relevance, with ICICI Direct pitching smallcap ETFs as a core allocation opportunity for investors preparing for the next market upcycle.
In a new research note, ICICI Direct argued that the smallcap segment has evolved substantially over the past few years with deeper liquidity, larger market capitalisation and stronger earnings growth, making it increasingly suitable for long-term portfolio allocation.
The brokerage believes the recent correction in smallcaps may have already created the setup for the next leg of gains.
The Nifty Smallcap 250 index, after falling nearly 23% between September 2024 and March 2026, has rebounded sharply and risen over 20% from its March lows, signalling renewed investor appetite.
“Smallcap segment is well poised for the next leg of market up-cycle,” the report said, while advising investors to adopt a buy-on-dips or systematic investment approach, especially after the sharp recovery seen in the last two months.
Smallcaps Continue to Outperform Large Caps
ICICI Direct highlighted that the smallcap universe has historically delivered stronger returns than benchmark indices over long periods.
As of May 6, 2026, the Nifty Smallcap 250 delivered a CAGR of 19% over five years, 16% over ten years, 14.4% over fifteen years, and 13% over twenty years.
By comparison, the Nifty 50 generated 12%, 13%, 12% and 11% CAGR, respectively, over the same periods.
The outperformance becomes even more visible during bull markets.
Between March 2023 and September 2024, the Nifty Smallcap 250 surged 114%, outperforming the 58% rise in Nifty 50 and 102% gain in Nifty Midcap 150.
However, ICICI Direct cautioned that smallcaps remain a high-beta segment, often underperforming during corrections. During the September 2024–March 2026 consolidation phase, the Nifty Smallcap 250 fell 23%, deeper than the 15% decline in Nifty 50.
Why ETFs Instead of Active Funds?
The report strongly favours smallcap ETFs over stock-picking or active fund selection, arguing that ETFs reduce selection risk in a volatile market segment.
Performance divergence among active smallcap funds remains wide.
According to the note, the best-performing active smallcap fund delivered 31% return over three years, while the worst generated only 14%. Similar gaps exist over five-year and ten-year periods.
“Reduced selection risk helps investors focus on allocation,” the report noted.
The ETF route also allows investors to add exposure during market corrections without worrying about individual stock or fund underperformance.
Valuation Comfort and Earnings Growth
ICICI Direct also pointed to attractive valuations.
The Nifty Smallcap index trades at about 17x forward earnings on a two-year basis, while delivering estimated earnings CAGR of around 23%, implying a PEG ratio of 0.7x.
In comparison, Nifty 50 trades at about 17x forward P/E with 16% earnings CAGR, while midcaps trade at roughly 22x P/E for 17% growth.
The report argues this gives smallcaps a relatively stronger growth-to-valuation equation.
Smallcap ETF Market Still Small but Expanding
India currently has only six smallcap ETFs, but the category is expanding rapidly as asset managers move to capture rising investor demand.
Among them, HDFC Asset Management Company’s HDFC Nifty Smallcap 250 ETF leads with over ₹2,000 crore AUM, followed by products from Motilal Oswal Financial Services, Groww, Mirae Asset Financial Group, DSP Asset Managers, and Zerodha.
For investors willing to accept volatility, ICICI Direct’s message is clear: smallcap ETFs may no longer be a satellite allocation — they could increasingly become part of the core portfolio strategy.
(Disclaimer: This article is only for informational purposes. Please consult SEBI-registered advisors for investment decisions.)
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