Jo Walton has an interesting piece on Neil Gaiman’s Stardust in which he argues that while the book is indeed fantastical, it isn’t fantasy – at least not in the modern sense of the term:
Of course Stardust uses some of the worldbuilding techniques of fantasy, and any book about a young man going on a quest for a fallen star and encountering witches and magic is inherently fantastical. But genre fantasy post-Tolkien has become connected to specific imaginary history and geography in a way that Stardust scorns. This is not only a book without a map but a book where the very idea of a map would be ridiculous. The geography makes sense in an intuitive magical way that works for the plot. The same goes for the history and the social systems. This isn’t a book that you can consider comfortably in the same genre as Daniel Abraham’s Long Price Quartet or Patrick Rothfuss’s Kingkiller Chronicles. It’s just not interested in doing the same kind of thing — it’s coming at the numinous from quite a different direction. It has different ancestors and works by different logic.
Stardust is very short and very beautiful and it reads just like a modern fairytale should.
If Stardust isn’t fantasy because it isn’t like Rothfuss or Martin or the other world-building fantasy epics, than none of Gaiman’s work is fantasy. Anansi Boys and American Gods certainly don’t qualify. Even Lewis’s Chronicles of Narnia would not make the cut. Lev Grossman’s The Magicians might not either and Harry Potter is a close call at best.
And if fairytales aren’t fantasy, then we must also strike Jonathan Strange & Mr Norrell from the canon, as well as Little, Big and any other modern fairytales we can root out.
Post-Tolkien fantasy is, of course, deeply infused with fairytales if only because Tolkien himself was fascinated with faerie and fairytales. Sure, the Dragon Lance books may be your typical party-of-heroes world-building narrative type fantasy, but it is no more the heir to the genre than Stardust or Jonathan Strange. These are all very different sorts of books, but I think they all belong on the fantasy shelves.
Fantasy is a big tent. We should make sure it stays that way.