Investors hunt for AI winners in small-cap tech stocks as overlooked ETF sees major inflows

The Invesco S&P SmallCap Information Tech ETF just reversed four straight years of outflows, signaling a quiet but meaningful rotation away from mega-cap AI plays.

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Add us on Google by Editorial Team May. 27, 2026

For years, the AI trade had exactly one playbook: buy Nvidia, buy Microsoft, buy the biggest names on the board, and watch the returns roll in. That playbook is getting a rewrite.

Investors are increasingly moving capital into small-cap US technology stocks positioned to benefit from AI growth, and the clearest proof point is the Invesco S&P SmallCap Information Tech ETF (PSCT). The fund has pulled in $49.7 million in net inflows in 2026 as of May 27, snapping a streak of four consecutive years of outflows. That’s not earth-shattering money by mega-cap standards, but for a small-cap tech ETF that investors had been steadily abandoning, it’s a meaningful reversal.

The small-cap AI thesis takes shape

The poster child for this trade is MaxLinear (MXL), which has seen its stock price surge by nearly 800% over the past year. The company makes high-speed optical connectivity solutions, the kind of technology that AI data centers need to shuttle enormous volumes of data between servers.

Why the rotation is happening now

Several forces are converging to make small-cap tech stocks more attractive than they’ve been in years.

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First, valuation compression in mega-cap AI names has made investors look elsewhere. After years of large-cap dominance, the easy multiple expansion in companies like Nvidia has slowed.

Second, expectations of lower interest rates have historically been a tailwind for small-cap stocks. Smaller companies tend to carry more floating-rate debt and are more sensitive to borrowing costs. When rate expectations shift downward, small-caps tend to outperform, and 2026 has seen exactly that dynamic play out.

Third, the AI spending cycle is maturing. Early-stage AI investment was concentrated among hyperscalers building massive GPU clusters. As that infrastructure scales, the demand ripples outward to suppliers, enablers, and niche technology providers. Many of those companies happen to be small-caps.

The broader small-cap ETF landscape tells a more nuanced story, though. Funds like the iShares Russell 2000 ETF (IWM) and iShares Core S&P Small-Cap ETF (IJR) have shown mixed inflows in 2026. The rotation isn’t a blanket bet on everything small. It’s more targeted, with investors specifically seeking out technology-focused small-caps rather than the entire small-cap universe.

The risks investors should weigh

Analysts have flagged that while the fundamental case for small-cap AI beneficiaries is real, the rally also carries speculative elements that investors need to respect.

There’s also the question of durability. Some of these companies are genuine beneficiaries of secular AI infrastructure spending. Others are riding a narrative wave that may not hold up if AI capital expenditures slow or if larger competitors move into their niches.

The comparison to prior market rotations is instructive. In late 2023 and early 2024, there was a brief small-cap rally that fizzled when the mega-cap tech trade reasserted itself. The difference this time is that the rotation appears to be driven by a more concrete catalyst: actual revenue growth from AI-related demand, not just hope. MaxLinear’s surge, for instance, is tied to real product demand from data center operators.

Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.