1 Historically Cheap Vanguard Index Fund to Buy Before It Soars 40%, According to a Wall Street Analyst
Small Cap Companies Russell 2000 It rose 10.4% in July, while large-cap stocks rose. Standard & Poor’s 500 (SNPINDEX: ^GSPC) It has been trading mostly sideways during the month. The last time the Russell 2000 outperformed the S&P 500 by a significant margin during any month was February 2000, according to Forbes.
Tom Lee, head of research at Fundstrat Global Advisors, believes this trend will continue in the coming months. He recently told CNBC that the Russell 2000 could rise another 40% by the end of the summer, meaning the index could top 3,100 in the not-too-distant future.
The reason for this is that small-cap companies historically trade at lower prices than large-cap companies. In addition, the Federal Reserve is expected to cut benchmark interest rates soon, and the rate cuts are expected to have a disproportionately positive impact on small-cap companies.
Short-term forecasts are vulnerable to inaccuracy because the stock market can behave irrationally when performance is measured in weeks and months. In fact, Warren Buffett once called short-term market expectations “poison.” But Lee has made insightful predictions in the past, such as being one of the few Wall Street analysts to predict that the S&P 500 will rise in 2023.
Investors should at least consider buying a position in an index fund that tracks the Russell 2000 Index, Vanguard Russell 2000 ETF (NASDAQ: VTWO) Fits the bill perfectly.
Small-cap stocks trade at 21st century lows
small cap stocks Large-cap stocks have underperformed significantly over the past decade. Since July 2014, Russell 2000 The S&P 500 has returned 126%, while the S&P 500 has gained 232%. As a result, small-cap stocks are now trading at their largest discount to large-cap stocks in decades.
Michael Simbalist in J.P. Morgan Chase “Small-cap stocks are at their lowest point in the 21st century, with market and political factors likely to favor them,” he wrote recently. He explained how small-cap stocks ended up there. Companies in the Russell 2000 are less profitable and more vulnerable to rising interest rates than companies in the S&P 500.
However, futures pricing data suggests that the Fed could cut its benchmark interest rate by 25 basis points three times in 2024, and that policymakers will implement six 25 basis point cuts before the end of July 2025. Goldman Sachs In February, analysts wrote: “In the US, 30% of Russell 2000 debt is funded on a floating-rate basis, compared with only 6% of S&P 500 debt. This means that small-cap companies should start feeling the benefits of lower interest rates faster than large-cap companies.”
In addition, Republican presidential candidate Donald Trump has promised to impose new and somewhat aggressive tariffs on imported goods. Some economists believe that such a policy would increase inflation and reduce the purchasing power of the typical American household by 2.7%. However, tariffs typically hurt large-cap companies more than small-cap companies, so the Russell 2000 could outperform the S&P 500 due to an indirect political catalyst.
But that doesn’t necessarily mean the Russell 2000 will be a profitable investment. Some analysts have warned that higher tariffs could cause a stock market downturn. The Russell 2000 may fall less sharply than the S&P 500. Moreover, political catalysts may play a small role in the short term, simply because investors may react to the results of the presidential election. But the real economic impact of tariffs will not be seen until they are implemented.
What Investors Should Know About the Vanguard Russell 2000 ETF
The Vanguard Russell 2000 ETF tracks the Russell 2000 Index, which measures the performance of about 2,000 small-cap stocks. In context, the average market capitalization of companies in the Russell 2000 and the S&P 500 is about $900 million and $35 billion, respectively.
Another important difference is the sector allocation of the stock market. The Russell 2000 is heavily weighted toward industrials (19%), healthcare (15%), and financials (15%), while the S&P 500 is heavily weighted toward information technology (32%), financials (12%), and healthcare (12%).
The top five positions in the Vanguard Russell 2000 ETF are listed by weight below.
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Aware: 0.4%
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FTAI Aviation: 0.4%
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Abercrombie & Fitch: 0.4%
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factory: 0.4%
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Farmers Market for Sprouts
The Vanguard Russell 2000 ETF has a reasonable expense ratio of 0.1%, which means investors will pay $1 per year for every $1,000 invested in the fund.
The bottom line is that the impending rate cut and historically cheap valuations make the Russell 2000 look particularly attractive right now. But investors should remember that Russell 2000 companies are much less profitable than S&P 500 companies, by which I mean that free cash flow margins are lower and more companies have negative earnings. So there is some symmetry and reason behind the historically cheap valuations.
Personally, I think it makes sense for patient investors to buy a few shares of the Vanguard Russell 2000 ETF now, simply because small-cap stocks have so many catalysts working in their favor. However, I wouldn’t allocate more than 5% to 10% of my portfolio to the Russell 2000. The S&P 500 has outperformed for so long that I don’t feel comfortable with that decision.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewein The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool recommends Sprouts Farmers Market. The Motley Fool has Disclosure Policy.
1 Historically Cheap Vanguard Index Fund to Buy Before It Surges 40%, According to Wall Street Analyst Originally posted by The Motley Fool
