When most people think of major stock market indexes, their minds go to the S&P 500, Nasdaq Composite, or Dow Jones because they’re the “Big 3.” One 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-cap stocks what the S&P 500 is to large-cap 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 could be a great addition to your portfolio for the long haul.
Why invest in small-cap stocks?
Investing in small-cap stocks – which are typically categorized as companies with market caps between $250 million and $2 billion – is generally a higher risk/reward trade-off than investing in larger companies.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| VTWO | VANGUARD SCOTTSDALE FUNDS VANGUARD RISS200IDX FD ETF | 116.51 | +2.56 | +2.25% |
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On one hand, their small sizes usually mean they’re more susceptible to broader market and economic conditions (like interest rates) and are more volatile. On the other hand, their small size leaves much more room for growth. It doesn’t always play out this way, but in theory, it’s much easier to double a valuation from $500 million to $1 billion than from $500 billion to $1 trillion.
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Small cap doesn’t always mean a new, start-up-like company, either. It can be a well-established company operating in a niche. In either case, VTWO gives you access to 1,957 small-cap stocks from every major sector. It’s a true one-stop shop for small-cap stocks.
How has VTWO performed over the years?
Through market close on June 5, VTWO is up 13.2%, marking one of its best starts to a year in a while. And although its gains this year are impressive, it’s important to zoom out and look at longer-term performance as well. Here is 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. Year-to-date returns based on market close on June 5.
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VTWO’s underperformance over the years doesn’t quite scream “invest in me,” but its main goal is diversification and covering more ground, rather than having the bulk of your returns rely on a handful of tech giants like the “Magnificent Seven” stocks.
I wouldn’t make VTWO the bulk of your portfolio (aim for less than 10%), but having some exposure is a great way to tap into growth potential while also setting your portfolio up to have a winner during times when small-cap stocks usually outperform the market (like now). If you think big tech is due for a pullback, now is a good time to add some of the little guys to your portfolio.
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 a disclosure policy.
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