Artificial intelligence has been the dominant investment topic over the past two years, Nvidia It has stolen the show. The company has reported triple-digit sales growth for the past five quarters, and its shares have risen more than sevenfold since January 2023, making it the best-performing stock in the Standard & Poor’s 500 (SNPINDEX: ^GSPC) During that period.
However, AI isn’t the only topic investors should be exploring. The hedge fund managers listed below (all billionaires) sold Nvidia shares in the second quarter and bought Nvidia shares in the third quarter. iShares Russell 2000 ETF (NYSEMKT: IWM)an index fund that tracks small-cap companies. Russell 2000.
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Ken Griffin of Citadel Advisors sold 9.2 million shares of Nvidia, reducing his stake by 79%. He also added 125,383 shares of the iShares Russell 2000 ETF, increasing his stake by 27%.
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David Shaw of D.E. Shaw & Co. sold 12.1 million shares of Nvidia stock, reducing his holding by 52%. He also added 638,084 shares of the iShares Russell 2000 exchange-traded fund, increasing his holding by 169%.
It is important to note that Ken Griffin and David Shaw run the best performing hedge funds in terms of net gains since inception. Neither fund manager has closed their positions in Nvidia, so we cannot assume that they have lost confidence in the chipmaker. But we can assume that they are bullish on small-cap stocks.
Tom Lee, head of research at Fundstrat Global Advisors, agrees. In January, he told CNBC that the Russell 2000 could end the year above 3,000. That would be a 43% gain from its current level of 2,091, suggesting similar gains for shareholders of the iShares Russell 2000 exchange-traded fund.
Here’s what investors should know.
Small Cap Stock Status
the Russell 2000 The index measures the performance of nearly 2,000 Small Cap Companies U.S. stocks represent 5% of domestic stocks by total value. The average market capitalization of the Russell 2000 companies is about $1 billion. By comparison, the S&P 500 is an index of large-cap companies, with an average market capitalization of $33 billion.
Tom Lee is bullish on small-cap stocks for two reasons. First, small-cap valuations are at their lowest in decades compared to large-cap stocks. Second, small-caps are more sensitive to interest rates, so they will benefit more than large-caps when the Fed starts cutting rates.
Regarding the evaluations, JPMorgan “Small-cap stocks are at their lowest point in the 21st century, with market and political catalysts likely to favor them,” strategist Michael Simbalist recently wrote. But he also noted that small-cap companies are more likely to have lower margins and negative earnings than large-cap companies.
When it comes to interest rates, small-cap companies rely more on floating-rate debt, which is debt with interest rates that change and are tied to a benchmark, often the federal funds rate. So when the Fed lowers its benchmark interest rate, floating-rate debt becomes less expensive. “Small-cap companies tend to carry more floating-rate debt, so lower interest rates are very beneficial,” says Sonu Varghese of the Carson Group.
The important thing is that the market expects the Federal Reserve to start cutting interest rates at its meeting later this month.
iShares Russell 2000 ETF
The iShares Russell 2000 ETF allows investors to spread capital across the Russell 2000 Index, giving them diversified exposure to nearly 2,000 small-cap companies. Here is a list of the top 10 holdings in the ETF by weight:
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Vaccine cell: 0.5%
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FTAI Aviation: 0.5%
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aware: 0.4%
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Sprouts Farmers Market: 0.4%
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Al Raya Group: 0.3%
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factory: 0.3%
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Flor: 0.3%
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Halozyme treatments: 0.3%
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Mueller Industries: 0.3%
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Applied industrial technologies: 0.3%
The Russell 2000 small-cap index has consistently underperformed the S&P 500 over the past five, 10 and 20 years, and the underperformance has often been severe. For example, the Russell 2000 has returned 105% over the past decade, at a compound annual rate of 7.4%. Meanwhile, the S&P 500 has returned 224%, at a compound annual rate of 12.4%.
The iShares Russell 2000 ETF has an expense ratio of 0.19%, meaning annual fees will be $1.90 for every $1,000 invested in the fund. For comparison, the average expense ratio across U.S. index funds was 0.36% in 2023, according to Morning star.
The bottom line is that patient investors should consider buying a small stake in the iShares Russell 2000 ETF today. The fund’s price could rise as the Federal Reserve begins to cut interest rates and small-cap stocks trade at historically low valuations.
But shareholders shouldn’t expect a 43% return by year-end. Investors who own the iShares Russell 2000 ETF should also consider balancing their portfolio with an S&P 500 index fund. The Russell 2000 could outperform the S&P 500 in the future, but history suggests that outcome is unlikely to last for long.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewein The Motley Fool has positions in Nvidia. The Motley Fool has positions in and recommends JPMorgan Chase and Nvidia. The Motley Fool recommends Sprouts Farmers Market. The Motley Fool has Disclosure Policy.
Billionaires Sell Nvidia Shares, Buy Index Fund That Could Rise 43%, According to Wall Street Analyst Originally posted by The Motley Fool