Eddie Ghabour, CEO of Key Advisors Wealth Management, expects a market correction this summer after a rapid increase in technology stocks, advising investors to prepare for uncertain trades and look for buying opportunities.
When most people think of the major stock market indexes, their minds go to the S&P 500, the Nasdaq Composite, or the Dow Jones because they are the “Big 3.” Another index that often flies under the radar is the Russell 2000, which tracks the smallest 2,000 companies in the Russell 3000 index.
The Russell 2000 is to small stocks what the S&P 500 is to large stocks, and so far this year, ETFs like the Vanguard Russell 2000 ETF have outperformed all of the “Big 3” indexes. If you have $1,000 available to invest, it can be a great addition to your portfolio for the long term.
Why invest in small stocks?
Investing in small-cap stocks — typically classified as companies with a market cap between $250 million and $2 billion — is often a higher risk/reward trade than investing in larger companies.
| A ticker | Security | Finally | Change | change % |
|---|---|---|---|---|
| VTWO | VANGUARD SCOTTSDALE FUNDS VANGUARD RISS200IDX FD ETF | 117.14 | +3.19 |
+2.80% |
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US stocks are hovering near record highs, along with metals including silver and gold. (Michael M. Santiago/Getty Images/Getty Images)
On the other hand, their smaller sizes often mean they are more vulnerable to broader market and economic conditions (such as interest rates) and volatility. On the other hand, their small size leaves a lot of room for growth. It doesn’t always play out this way, but in theory, it’s much easier to double the value from $500 million to $1 billion than from $500 billion to $1 trillion.
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A small cap doesn’t always mean a new company, like a startup, either. It can be a stable company operating in a niche area. Either way, VTWO gives you access to 1,957 small stocks from all major sectors. A true one-stop shop for small stocks.
How has VTWO performed over the years?
By the close of the market on June 5, VTWO was up 13.2%, marking its best start to a year yet. And while its gains this year are impressive, it’s important to step back and look at long-term performance. Here’s how VTWO has performed over the years compared to the “Big 3” indexes:
| ETF or Index | Year to Date Returns | 3 Year Annualized Average | 5 Year Annualized Average | 10 Year Annualized Average |
| VTWO | 13.2% | 15.2% | 4.4% | 9.3% |
| S&P 500 | 7.7% | 19.9% | 11.8% | 13.4% |
| Nasdaq Composite | 10.7% | 24.7% | 13.2% | 17.9% |
| Dow Jones | 5.1% | 14.9% | 7.9% | 11% |
Source: YCharts. Table by author. Current returns based on market close on June 5th.
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VTWO’s underperformance over the years doesn’t exactly scream “invest in me,” but its main goal is to diversify and cover more ground, rather than relying on a few tech giants like the “Magnificent Seven” stocks for the bulk of your returns.
I wouldn’t make VTWO the bulk of your portfolio (aim for less than 10%), but some exposure is a good way to tap into growth potential while also structuring your portfolio to be a winner in times when smaller stocks typically outperform the market (like now). If you think the big tech is going to be held back, now is a good time to add the little guys to your portfolio.
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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has disclosure policy.
