Small-cap tech stocks have delivered respectable returns over the past three years, though they’ve significantly trailed their large-cap counterparts. A good proxy for the group, the Invesco S&P SmallCap Information Technology ETF (PSCT), has posted annualized total returns of around 14%–14.5% through late 2025, a solid performance considering the impact of 2022’s rate hikes and tighter funding conditions.
However, large-cap tech has performed on an entirely different scale. The iShares U.S. Technology ETF (IYW), representing mega-cap names, has compounded at roughly 39% annually over the same period, according to BlackRock. A recent update from Polar Capital quantifies this disparity: their data show that small-cap tech (Russell 2000 Technology) underperformed large-cap tech (Russell 1000 Technology) by 63 percentage points over three years and 116 points over five, on a cumulative basis.
Valuation metrics suggest broader structural challenges. The CFA Institute and Wellington both note that U.S. small caps currently trade at a 25%–30% forward P/E discount to large caps: near multi-decade lows. According to Reuters, small caps now represent just ~1.2% of total U.S. market cap, approaching a 100-year low, while an uptick in reverse splits further signals stress across the segment.
Going forward, valuations and positioning reflect considerable investor caution. Should interest rates stabilize and AI-related investment broaden beyond a small set of dominant firms, historical patterns suggest the potential for a reversal in small-cap relative performance. That said, such catch-up phases are conditional, not guaranteed.
While the overall picture for small-cap tech doesn’t look good, there were a handful of performers over the past three years, which we have listed below.
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Our Methodology
For our list, we scoured through the small-cap tech sector and picked stocks with the highest 3-year annualized returns and ranked them accordingly. We have also included their hedge fund sentiment as of Q3 2025. We sourced the data for 3-Year CAGRs from stockanalysis.com.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 427.7% since May 2014, beating its benchmark by 264 percentage points (see more details here).
10. Similarweb Ltd. (NYSE:SMWB)
3Y CAGR: 15.21%
Market Cap: $666.09 Million
Number of Hedge Fund Holders: 17
Similarweb Ltd. (NYSE:SMWB) is one of the best‑performing small‑cap tech names over the past few years, and its latest developments caught renewed analyst interest.
On November 17, Needham & Company LLC reiterated a “Buy” rating on Similarweb, with a price target of $14.00. Their bullish stance was driven by what they called a substantial “large language model (LLM) data opportunity,” which they estimate could become a near‑$1 billion revenue stream over time. Needham also pointed to improved go‑to‑market execution and early signs of better customer retention, which may boost revenue retention metrics heading into fiscal 2026.
This rating came just days after the company’s Q3 2025 earnings (released Nov 11), in which Similarweb reported EPS of $0.05, beating consensus of $0.02, while generating $71.79 million in revenue, just shy of the ~$71.95 million analysts expected.
Still, the quarter was marked by a negative net margin of –11.2% and a negative return on equity of –78.25%, underscoring that profitability remains elusive even as top‑line and per‑share metrics slightly beat expectations.
Similarweb Ltd. (NYSE:SMWB) offers a cloud‑based digital intelligence platform that aggregates and analyzes web and app traffic data from millions of sites and applications globally. Businesses, marketers, and analysts use its insights to track market trends, benchmark competitors, optimize digital strategy, and make data‑driven decisions.
9. Magic Software Enterprises Ltd. (NASDAQ:MGIC)
3Y CAGR: 17.65%
Market Cap: $1.22 Billion
Number of Hedge Fund Holders: 2
Magic Software Enterprises Ltd. (NASDAQ:MGIC) is one of the best-performing small-cap tech stocks in the past three years. On November 18, the company posted record Q3 revenue of $161.7 million, up 13.1% year-over-year, powered by demand across its IT consulting and enterprise software services.
Despite a stable gross margin at 27.3%, the company tightened the screws operationally: GAAP operating income rose 13.6% to $17.1 million, while non-GAAP operating profit hit $19.9 million, up 8.1% from the prior year. Bottom line: net income climbed to $9.9 million, or $0.20 per diluted share, compared to $0.17 last year, a modest but steady gain.
CEO Guy Bernstein said Magic “achieved all-time highs in revenues, gross profit and operating income,” crediting “sustained demand for our digital, AI-driven and cloud transformation solutions” and “disciplined execution across the organization.” He also highlighted the company’s “robust momentum” in the U.S. and called the pending merger with Matrix I.T. “an exciting new phase” that is expected to boost scale, market reach, and tech depth.
Magic Software Enterprises Ltd. (NASDAQ:MGIC), based in Israel, provides IT consulting, cloud integration, low-code development, and automation tools to mid- and large-enterprise clients worldwide.
