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1 Russell 2000 ETF to Buy Ahead of the Small-Cap Bull Market | The Motley Fool
The Russell 2000 is crushing the S&P 500 in July, but it's still trading in bear territory. The Russell 2000 index represents approximately 2,000 of the smaller listed stocks in the U.S. Historically, it hasn't performed as well as the S&P 500 because it doesn't have as much exposure to fast-growing technology segments like cloud computing, enterprise software, and artificial intelligence (AI). However, the Russell 2000 is up 7.4% in July alone, compared to a mere 1.5% gain in the S&P 500. Investors are increasingly bullish on the smaller end of the market because it will likely benefit the most from interest rate cuts, which are forecast to come before the end of the year. Technically speaking, the Russell 2000 has been in a bear market since 2022. It won't officially enter a new bull market until it makes a new all-time high, but it only has to rise another 10.9% to get there. We've seen how quickly the Russell can make up ground recently, so if economic conditions turn in favor of small caps as expected, it won't take long for the index to move higher. Buying the iShares Russell 2000 ETF (IWM -0.51%) is a simple way to get exposure to this trend, and here's why investors might want to add it to their portfolio. The S&P 500 faces growing concentration risk right now, because the top five stocks in the index account for 26.2% of its value. They each operate in the technology sector, so any hiccup in the enthusiasm for artificial intelligence (AI) stocks could cause the entire index to underperform, much like we've seen so far in July. The Russell 2000 is more balanced, with the largest stock in the index accounting for just 1.77% of its total value. The iShares exchange-traded fund (ETF) is even less concentrated. It uses a representative sampling strategy, which means its portfolio is constructed to have a similar profile to the Russell 2000 even if its holdings differ slightly. The iShares ETF holds 1,989 small-cap stocks, and here are its top five positions and their weighting: Data source: iShares. Portfolio weightings are accurate as of July 17, 2024, and are subject to change. Insmed is a biopharmaceutical company focused on developing treatments for rare diseases. Its Arikayce drug is the only approved medication in the U.S. for treating the rare MAC lung disease. Insmed has a market capitalization of $12.2 billion, which is a good reference point for the size of the other companies in the iShares ETF. FTAI Aviation offers maintenance services and aftermarket parts for airplane engines, including those manufactured by industry giants like GE Aerospace. Its stock is up a whopping 127% this year alone amid Boeing's production issues because some analysts believe fewer deliveries of new planes could lead to more maintenance requirements for aging fleets. There are some hidden gems in the iShares ETF outside of its top five. Tenable Holdings is a specialist in the vulnerability management segment of the cybersecurity industry, and Axcelis Technologies is a critical semiconductor company that is about to experience a strong tailwind from the AI boom. Tech giants like Nvidia and Microsoft are sitting on mountains of cash, so they typically don't need to borrow money. Smaller companies, on the other hand, often rely on debt to fuel their growth, so they are very sensitive to changes in interest rates. Wall Street generally expects the U.S. Federal Reserve to cut interest rates two times (and a few analysts are betting on three times) before the end of 2024 on the back of cooling inflation data and a recent uptick in the unemployment rate. That's one of the key reasons for the spike in the Russell 2000 over the last few weeks. Lower rates will allow the small caps to borrow more money, which could drive faster growth, and it will also translate into lower debt-servicing costs, which should directly boost their earnings. The iShares ETF trades at a price-to-earnings (P/E) ratio of just 15.9 (excluding companies with negative earnings). That makes it far cheaper than the S&P 500, which trades at a P/E ratio of 24.3, but the S&P certainly deserves some premium due to the sheer quality of the stocks in the index. The iShares ETF has delivered a compound annual return of 7.6% since its inception in the year 2000, which is on par with the S&P 500 over the same period. However, its average annual return of 6.9% over the last 10 years significantly lags the 13.2% annual gain in the S&P. The widening gap can be explained by the rapid growth of tech stocks, which is another reason investors are willing to pay a premium for the S&P over the Russell. With that said, falling interest rates should lead to a more favorable economic environment for small caps. That will drive further momentum in the Russell 2000 and potentially catapult it into a new bull market. Therefore, the iShares ETF could be a valuable addition to a balanced portfolio.
[2]
1 Russell 2000 ETF to Buy Ahead of the Small-Cap Bull Market
The Russell 2000 index represents approximately 2,000 of the smaller listed stocks in the U.S. Historically, it hasn't performed as well as the S&P 500 because it doesn't have as much exposure to fast-growing technology segments like cloud computing, enterprise software, and artificial intelligence (AI). However, the Russell 2000 is up 7.4% in July alone, compared to a mere 1.5% gain in the S&P 500. Investors are increasingly bullish on the smaller end of the market because it will likely benefit the most from interest rate cuts, which are forecast to come before the end of the year. Technically speaking, the Russell 2000 has been in a bear market since 2022. It won't officially enter a new bull market until it makes a new all-time high, but it only has to rise another 10.9% to get there. We've seen how quickly the Russell can make up ground recently, so if economic conditions turn in favor of small caps as expected, it won't take long for the index to move higher. Buying the iShares Russell 2000 ETF (NYSEMKT: IWM) is a simple way to get exposure to this trend, and here's why investors might want to add it to their portfolio. The iShares ETF is a great way to invest in small caps The S&P 500 faces growing concentration risk right now, because the top five stocks in the index account for 26.2% of its value. They each operate in the technology sector, so any hiccup in the enthusiasm for artificial intelligence (AI) stocks could cause the entire index to underperform, much like we've seen so far in July. The Russell 2000 is more balanced, with the largest stock in the index accounting for just 1.77% of its total value. The iShares exchange-traded fund (ETF) is even less concentrated. It uses a representative sampling strategy, which means its portfolio is constructed to have a similar profile to the Russell 2000 even if its holdings differ slightly. The iShares ETF holds 1,989 small-cap stocks, and here are its top five positions and their weighting: Data source: iShares. Portfolio weightings are accurate as of July 17, 2024, and are subject to change. Insmed is a biopharmaceutical company focused on developing treatments for rare diseases. Its Arikayce drug is the only approved medication in the U.S. for treating the rare MAC lung disease. Insmed has a market capitalization of $12.2 billion, which is a good reference point for the size of the other companies in the iShares ETF. FTAI Aviation offers maintenance services and aftermarket parts for airplane engines, including those manufactured by industry giants like GE Aerospace. Its stock is up a whopping 127% this year alone amid Boeing's production issues because some analysts believe fewer deliveries of new planes could lead to more maintenance requirements for aging fleets. There are some hidden gems in the iShares ETF outside of its top five. Tenable Holdings is a specialist in the vulnerability management segment of the cybersecurity industry, and Axcelis Technologies is a critical semiconductor company that is about to experience a strong tailwind from the AI boom. Interest rate cuts could be around the corner Tech giants like Nvidia and Microsoft are sitting on mountains of cash, so they typically don't need to borrow money. Smaller companies, on the other hand, often rely on debt to fuel their growth, so they are very sensitive to changes in interest rates. Wall Street generally expects the U.S. Federal Reserve to cut interest rates two times (and a few analysts are betting on three times) before the end of 2024 on the back of cooling inflation data and a recent uptick in the unemployment rate. That's one of the key reasons for the spike in the Russell 2000 over the last few weeks. Lower rates will allow the small caps to borrow more money, which could drive faster growth, and it will also translate into lower debt-servicing costs, which should directly boost their earnings. Small caps look cheap relative to their larger peers The iShares ETF trades at a price-to-earnings (P/E) ratio of just 15.9 (excluding companies with negative earnings). That makes it far cheaper than the S&P 500, which trades at a P/E ratio of 24.3, but the S&P certainly deserves some premium due to the sheer quality of the stocks in the index. The iShares ETF has delivered a compound annual return of 7.6% since its inception in the year 2000, which is on par with the S&P 500 over the same period. However, its average annual return of 6.9% over the last 10 years significantly lags the 13.2% annual gain in the S&P. The widening gap can be explained by the rapid growth of tech stocks, which is another reason investors are willing to pay a premium for the S&P over the Russell. With that said, falling interest rates should lead to a more favorable economic environment for small caps. That will drive further momentum in the Russell 2000 and potentially catapult it into a new bull market. Therefore, the iShares ETF could be a valuable addition to a balanced portfolio. Should you invest $1,000 in iShares Trust - iShares Russell 2000 ETF right now? Before you buy stock in iShares Trust - iShares Russell 2000 ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and iShares Trust - iShares Russell 2000 ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $722,626!* Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool recommends Sprouts Farmers Market and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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As the market anticipates a potential small-cap bull market, investors are turning their attention to Russell 2000 ETFs. This article explores the benefits and risks of investing in these funds, with a focus on the Vanguard Russell 2000 ETF (VTWO).
As the investment landscape evolves, small-cap stocks are gaining attention from savvy investors. These companies, typically valued between $300 million and $2 billion, offer significant growth potential and have historically outperformed their large-cap counterparts during economic recoveries 1. With the current market conditions hinting at a possible small-cap bull market, many are considering Russell 2000 ETFs as a strategic investment option.
The Russell 2000 Index is a benchmark for small-cap stocks in the United States. It comprises approximately 2,000 of the smallest securities from the Russell 3000 Index, representing about 10% of the total market capitalization of that broader index 2. This makes Russell 2000 ETFs an attractive vehicle for investors looking to gain exposure to the small-cap segment of the market.
Among the various Russell 2000 ETFs available, the Vanguard Russell 2000 ETF (VTWO) stands out as a particularly compelling option. With an expense ratio of just 0.10%, VTWO offers cost-effective exposure to the small-cap market [1]. This low fee structure can significantly impact long-term returns, especially when compared to actively managed funds with higher expense ratios.
VTWO has demonstrated solid performance, with a 10-year average annual return of 8.46% as of June 30, 2023 [1]. While past performance doesn't guarantee future results, it provides insight into the fund's historical behavior. The ETF's broad diversification across various sectors and industries helps mitigate company-specific risks, making it an attractive option for investors seeking balanced exposure to small-cap stocks.
Investing in small-cap stocks, even through diversified ETFs, comes with inherent risks. Small companies are often more volatile and susceptible to economic downturns than their larger counterparts [2]. Additionally, the Russell 2000 Index includes some micro-cap stocks, which can be even more volatile. Investors should carefully consider their risk tolerance and investment goals before allocating funds to small-cap ETFs.
While the prospect of a small-cap bull market is enticing, timing the market accurately is notoriously difficult. Experts suggest that a long-term investment approach, rather than attempting to time market cycles, is often more prudent [1]. Regular investments in a fund like VTWO, regardless of market conditions, can help investors benefit from dollar-cost averaging and potentially smooth out the impact of market volatility over time.
For many investors, allocating a portion of their portfolio to small-cap stocks through ETFs like VTWO can enhance overall diversification. The unique growth characteristics of small-cap stocks can complement large-cap holdings and potentially improve risk-adjusted returns [2]. However, the appropriate allocation will vary depending on individual financial situations, risk tolerance, and investment objectives.
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A Wall Street analyst forecasts a potential 415% surge for a Vanguard ETF in 2024. This prediction has caught the attention of investors and market watchers, sparking discussions about the ETF's prospects and the broader market outlook.
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Russell Investments' strategist Dominica Wilson discusses the potential of small-cap stocks in the current market environment, citing attractive valuations and opportunities for growth.
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The Russell 2000 index outperforms the S&P 500 as small-cap stocks gain momentum. Investors eye potential opportunities in financial and real estate sectors ahead of expected Federal Reserve interest rate cuts.
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The recent surge in small-cap stocks has caught investors' attention, but opinions are divided on whether this rally will persist. While some see potential for continued growth, others caution about the sustainability of this trend.
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As the S&P 500 enters a bull market, investors are eyeing Vanguard ETFs as potentially lucrative options. Two specific funds are gaining attention for their strong performance and diversification benefits.
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