Is the Vanguard Russell 2000 ETF a millionaire maker?

Most of the stock market’s performance in recent years has been driven by large companies — and it’s not just the megacap tech stocks collectively referred to as the “Magnificent Seven.” Meanwhile, small-cap stocks lagged behind.

In fact, small-cap stocks have collectively underperformed S&P 500 by 55 percentage points in the last five years and by 125 percentage points in the last decade. The last time small-caps traded at such a discount to large-caps on a price-to-book basis was in the late 1990s.

However, there is good reason to believe that the gap between small and large caps will narrow over the next few years. That’s why Vanguard Russell 2000 ETF (VTWO 3.13%) might be worth a closer look right now. Not only could the index fund outperform over the next few years, it could be a great entry point for long-term investors looking to build wealth.

Vanguard Russell 2000 ETF

The Russell 2000 is widely considered to be the premier index of small-cap stocks. It consists of 2,000 components. Stocks in the Russell 2000 have an average market capitalization of $3.1 billion, and although it is a weighted index, no stock makes up more than 0.41% of it.

The Vanguard Russell 2000 ETF tracks this small-cap benchmark and does so for minimal cost. The fund has an expense ratio of just 0.10%, meaning that for every $1,000 you have in the fund, only $1 will go toward fees. (Note: This is not something you actually have to pay — it will be reflected in your stock performance.)

Why now might be a great time to buy

We’ve mentioned the difference in valuation between small-cap and large-cap stocks, so let’s run some numbers to illustrate this. Note that all these values ​​refer to the average of the stocks in the index.

Data source: Vanguard. All values ​​at 31.07.2024.

So small-cap stocks as a group trade for a significantly lower P/E multiple than large-caps and for less than half price-to-record valuation.

However, the Federal Reserve is expected to start cutting benchmark interest rates in September and continue to cut them for the foreseeable future. A falling rate environment could be a positive catalyst for small-cap stocks in particular, and for a few reasons:

• Smaller companies are more likely to use leverage compared to large caps, and lower rates mean cheaper borrowing costs.
• Smaller companies tend to be the beneficiary of money flowing back into stocks as yields on risk-free assets fall and investors shift money into riskier assets that could produce market returns.

But in the long run?

While I think the Russell 2000 is likely to deliver huge returns over the next few years, I don’t suggest it as just a short-term investment. In fact, since its inception in 2010, the Vanguard Russell 2000 ETF has delivered annualized returns of 10.7%. If you were to achieve this level of return over a 30-year period, it would turn $10,000 into more than $211,000. If you invest, add to your investment regularly and hold for a long time, the Vanguard Russell 2000 ETF could indeed be a millionaire.