Small business owners grew more optimistic in May, reflecting improved expectations for business conditions and sales, according to the latest data from the National Federation of Independent Business (NFIB). The latest data revealed that the small business optimism index climbed to 98.8 in May, up from 95.8 in April. This marked the first rise since September.

Small businesses serve as a vital barometer of the U.S. economy. The rebound in optimism could reflect a stabilizing business environment, offering a bullish signal for market sentiment and boding well for small-cap stocks and ETFs.

Given this, we have highlighted a few top-ranked ETFs that could be better plays going forward. These are iShares Core S&P Small-Cap ETF IJR, iShares Russell 2000 ETF IWM, Vanguard Small-Cap ETF VB, Schwab U.S. Small-Cap ETF SCHA and Vanguard Russell 2000 ETF VTWO. These funds have a Zacks ETF Rank #1 (Strong Buy) or #2 (Buy), suggesting their outperformance in the months ahead.

Economic data in May reinforced optimism. After five consecutive months of declines, consumer confidence rebounded. The U.S. labor market remained resilient amid the tariff chaos. The economy added more-than-expected 139,000 jobs in May and the unemployment rate remained unchanged at 4.2% (read: S&P 500 Wraps Up Best May Since 1990: 5 Top Stocks in the ETF).

The share of business owners expecting improved business conditions jumped 10 percentage points month over month to 25%, while those anticipating higher real sales volumes rose 11 points to 10%.

Although optimism recovered in May, uncertainty is still high among small business owners as taxes, tariffs and inflation fear are keeping owners on edge. Taxes have emerged as the top concern, cited by 18% of the respondents. This is the first time this issue has ranked highest since late 2020, surpassing worries about labor quality and inflation.

Inflation remains a concern, too, with 14% of owners listing it as their biggest problem even though consumer prices rose just 2.3% year over year in April, the lowest reading since February 2021.

According to World Bank forecasts, U.S. economic growth will likely slow down to 1.4% this year from 2.8% in 2024, citing the burden from Trump’s tariffs. The agency also stated that the rise in trade barriers, heightened uncertainty and the spike in financial market volatility are set to weigh on private consumption, international trade and investment.

ETFs in Focus

We have profiled the abovementioned ETFs here:

i Shares Core S&P Small-Cap ETF (IJR)

iShares Core S&P Small-Cap ETF is the largest and most popular ETF in the small-cap space, with an AUM of $78.1 billion and an average daily volume of 4 million shares. It follows the S&P SmallCap 600 Index and holds 629 stocks in its basket, with none accounting for more than 0.6% of the assets. Industrials, financials, consumer discretionary and information technology are the top four sectors with double-digit exposure each. The product charges investors 6 bps in annual fees.

iShares Russell 2000 ETF (IWM)

iShares Russell 2000 ETF tracks the Russell 2000 Index and holds 1,934 well-diversified stocks in its basket. IWM has key holdings in financials, industrials, healthcare, and information technology. iShares Russell 2000 ETF has AUM of $61.9 billion and trades in an average daily volume of 30 million shares. It charges 19 bps in annual fees (read: 3 Factors That Could Give Struggling Small-Cap ETFs a Boost).

Vanguard Small-Cap ETF (VB)

Vanguard Small-Cap ETF follows the CRSP US Small Cap Index and holds a basket of 1,349 stocks, with none holding more than 0.5% of the assets. Vanguard Small-Cap ETF is widely spread across various sectors, with industrials, consumer discretionary, financials, information technology and healthcare being the top five. Vanguard Small-Cap ETF has AUM of $62.4 billion and trades in a solid average daily volume of about 826,000 shares. It charges 5 bps in fees per year from investors.

Schwab U.S. Small-Cap ETF (SCHA)

Schwab U.S. Small-Cap ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, holding 1,713 stocks in its basket. Each security accounts for less than 0.5% of the assets. SCHA is widely spread across sectors, with financials, industrials, health care, information technology and consumer discretionary having double-digit exposure each. Schwab U.S. Small-Cap ETF has amassed $17 billion in its asset base and sees a solid volume of around 2.3 million shares a day. It has an expense ratio of 0.04%.

Vanguard Russell 2000 ETF (VTWO)

Vanguard Russell 2000 ETF tracks the Russell 2000 Index, holding 1,955 stocks in its basket, with none making up for more than 0.7% of the assets. It is widely spread across various sectors, with financials, industrials, healthcare, consumer discretionary, and information technology being the top five. Vanguard Russell 2000 ETF has accumulated $12.3 billion in its asset base and trades in an average daily volume of 1.3 million shares. The product charges 7 bps in annual fees.

Cautious Optimism

While confidence among small-cap companies is improving, they continue to grapple with headwinds such as evolving tax policies, persistent labor shortages and tighter credit conditions. These challenges could impact their earnings potential and could shape the trajectory of U.S. recovery.

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iShares Russell 2000 ETF (IWM): ETF Research Reports

iShares Core S&P Small-Cap ETF (IJR): ETF Research Reports

Schwab U.S. Small-Cap ETF (SCHA): ETF Research Reports

Vanguard Small-Cap ETF (VB): ETF Research Reports

Vanguard Russell 2000 ETF (VTWO): ETF Research Reports

This article originally published on Zacks Investment Research (zacks.com).

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