Small-Cap Stocks Could Have a Great 2025 — Here Are 2 ETFs You Can Buy Right Now

Date:

Small-cap stocks are trading for their lowest price-to-book valuation relative to their large-cap counterparts in more than 25 years. The average stock in the S&P 500 trades for 4.7 times book value and more than 27 times earnings, while the average stock in the Russell 2000 small-cap index has a price-to-book multiple of just 2 and a P/E ratio of around 17.

With the Federal Reserve finally beginning a much-anticipated cycle of interest rate cuts, there’s a solid case to be made that small-cap stocks are in a unique position to benefit. Instead of searching for the biggest winners in the small-cap world, here are two excellent low-cost ETFs you can buy and hold for the long term.

Vanguard Russell 2000 ETF

The Russell 2000 is a broad index of small-cap stocks, and the Vanguard Russell 2000 ETF (NASDAQ: VTWO) allows investors to get exposure to it without having to choose individual winners. With a rock-bottom 0.10% expense ratio, it lets you keep most of your gains over time.

As the name suggests, the fund invests in all 2,000 components of the index. While it is a weighted index — meaning that larger companies make up a larger proportion of assets — because of the relatively narrow range of market caps and massive number of stocks, even the largest components make up less than 0.5% of the fund’s assets.

SPDR Portfolio S&P 600 Small Cap ETF

The S&P 600 is the other major small-cap benchmark index, and the SPDR Portfolio S&P 600 Small Cap ETF (NYSEMKT: SPSM) is a smart way to invest in it through an index fund. With an expense ratio of just 0.03%, it is about the cheapest way to get exposure to small caps (or any other type of stock for that matter) in the entire market.

Of course, the biggest difference between the Russell 2000 and the S&P 600 is the number of holdings. The S&P 600 has less than one-third the number of stocks and is therefore a somewhat more concentrated ETF. Even so, the largest holding accounts for just 0.76% of the fund’s assets. However, in most other ways, the indexes have similar portfolios — for example, the median market cap of both funds’ holdings is $3.1 billion.

Why small caps, and why now?

Not only is there a large valuation gap between small-cap and large-cap stocks, but there’s reason to believe that the Fed’s newly started rate-cut cycle could be a disproportionately positive catalyst for small caps. In fact, over the past few months as rate cuts became increasingly more likely, the Russell 2000 outperformed the S&P 500 by more than 6 percentage points.

VOO Total Return Price Chart

VOO Total Return Price Chart

There are a few reasons why falling rates could be good for small caps. For one thing, small caps as a group tend to be more reliant on borrowed money (as a percentage of their total capitalization) and falling rates make it cheaper to take on debt. There is also the fact that there is a lot of money currently on the sidelines in risk-free instruments like Treasuries and CDs, and as rates come down, the appetite for riskier investments like stocks goes up, and market inflows often favor small caps.

The bottom line is that small-cap stocks could be set to outperform over the next few years, but these ETFs can be great to buy and hold for the long run, and can allow you to benefit from small-cap performance without the need to choose individual stocks.

Should you invest $1,000 in Vanguard Russell 2000 ETF right now?

Before you buy stock in Vanguard 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 Vanguard 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 $694,743!*

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*.

See the 10 stocks »

*Stock Advisor returns as of September 16, 2024

Matt Frankel has positions in Vanguard Russell 2000 ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Small-Cap Stocks Could Have a Great 2025 — Here Are 2 ETFs You Can Buy Right Now was originally published by The Motley Fool

Share post:

Popular

More like this
Related

Shohei Ohtani undergoes shoulder surgery after World Series injury

Shohei Ohtani's shoulder injury in the 2024 World Series...

Arne Slot’s Liverpool evoke European history with devastatingly effortless display against Leverkusen

The opposition on the night did admittedly influence some...

Eagles release tight end Albert Okwuegbunam

Eagles release tight end Albert Okwuegbunam originally appeared on...

Hornets center Nick Richards out indefinitely with fractured rib after leaving loss to Celtics early

Charlotte Hornets center Nick Richards will be sidelined indefinitely...