1 Vanguard ETF That Could Grow 37.1% Before the End of 2024, According to a Select Wall Street Analyst

Wall Street analysts don’t always make accurate predictions, but Tom Lee of Fundstrat Global Advisors has made a string of impressive calls over the past two years. He said that S&P 500 the index would reach 4,750 in 2023 and ended the year at 4,769. He then predicted that the S&P would reach 5,200 in 2024, which was the most optimistic target on Wall Street at the time, and it exceeded that level in the first three months.

Lee also forecast a 50% gain this year for Russell 2000an index comprising approximately 2,000 of the smallest companies listed on US exchanges. The potential for lower interest rates combined with cheap valuations are two key reasons for his prediction.

The Russell 2000 hit its 2024 high (so far) on July 16, and Lee came out that very day and reiterated his bullish stance in an interview with CNBC. But the index has traded lower since then and is on pace for a gain of just 10% for the year. That means it will need to rise another 37.1% over the next four months to meet Lee’s target.

Although it seems unlikely, Vanguard Russell 2000 ETF (NASDAQ: VTWO) closely tracks the index’s performance, so it’s an easy way for investors to take advantage of Lee’s prediction if he turns out to be right.

The Vanguard ETF is a simple way to invest in small caps

The composition of the Russell 2000 is very different from that of mainstream indexes such as the S&P 500. The Industrials sector is the largest in the Russell with an 18.9% weighting, followed by the Healthcare sector at 15.1% and the Financials sector at 15%. The largest sector in the S&P 500, on the other hand, is technology, with a sizable 31.4% weightage thanks to the rise of trillion-dollar tech giants such as Apple, Microsoftand Nvidia.

Additionally, the top 10 holdings in the Vanguard Russell 2000 ETF make up just 3.2% of its total portfolio value, so its performance isn’t due to a small number of stocks:

Data source: Vanguard. Portfolio weightings are accurate as of July 31, 2024 and are subject to change.

Insmed is a biotechnology company that develops therapies for rare diseases. It has a market cap of just $13.1 billion, and as the largest holding in the Vanguard ETF, it puts the size of the Russell 2000 companies into perspective.

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Sprouts Farmers Market, on the other hand, is a grocery chain with over 400 stores (and growing) across America. It specializes in healthy and organic foods. Then there’s Fluor, a construction and engineering company that builds energy and urban infrastructure.

Outside of its top 10, the Vanguard ETF also owns popular names such as the clothing retailer Abercrombie and Fitchcyber security power tenableand semiconductor services company Axcelis Technologies. Simply put, the ETF (and by extension the Russell 2000) is highly diversified.

Lower interest rates should benefit small-cap companies

“The time has come for politics to adapt.” These were the words of Federal Reserve Chairman Jerome Powell at the Jackson Hole Economic Symposium last month. The Fed has been locked in a battle to control high inflation for the past two years, which has seen the federal funds rate climb to a 23-year high of 5.33 percent in 2023, where it remains today.

But with CPI inflation back close to the Fed’s annualized 2% target, the central bank looks set to cut rates at its next meeting on September 17-18. In fact, appropriate CME Grouphis FedWatch tool, there could also be cuts in both November and December.

Lower interest rates tend to benefit small businesses more than their larger counterparts. Behemoths like Apple, Microsoft and Nvidia have so much cash to spare that they each return tens of billions of dollars to shareholders each year through dividends and share buybacks. In other words, it must not rely on debt financing.

However, smaller companies often borrow money to fuel their growth and tend to hold a large amount of floating-rate debt, which is highly sensitive to changes in interest rates. Lower rates will increase the borrowing capacity of small-cap companies and reduce their interest payments, which will be a direct tailwind for their earnings.

Lee believes these factors could also drive the Russell 2000’s valuation higher. Right now, the index trades at a price-to-earnings (P/E) ratio of 17.7 (excluding companies with negative earnings), which is much cheaper than the S&P 500, which trades at a P/E ratio of 27.4.

That said, investors pay a premium for the S&P 500 because of the quality of its constituents, such as Nvidia, Apple and Microsoft, which have successful long-term results, secure income streams and fortress balance sheets. The Russell 2000 may trade at a higher valuation when interest rates fall, but I don’t expect it to completely close the gap with the S&P.

Will Tom Lee be right?

Lee’s prediction for a 50% return in the Russell 2000 this year is ambitious. In fact, going back to 1988, the index has not made an annual gain of 50% or more.

The Vanguard Russell 2000 ETF has returned 10.4% compounded annually since its inception in 2010, so a 50% move would be highly unusual. That’s also a notable underperformer compared to the S&P 500, which delivered a compounded annual return of 13.7% over the same period.

Note that the federal funds rate was below 1% for most of the period from 2010 to 2022, and that wasn’t enough to propel Russell to huge returns. The Russell 2000 could climb further in the rest of 2024, but it’s unrealistic to expect a 37.1% gain from here to meet Lee’s year-end target.

That said, small caps could be a good place to put some money as interest rates fall, so adding the Vanguard Russell 2000 ETF to a balanced portfolio isn’t necessarily a bad move.

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Anthony Di Pizio has no position in any of the shares mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and SPS Commerce. The Motley Fool recommends CME Group, Sprouts Farmers Market and UFP Industries and recommends the following options: long $395 January 2026 Microsoft calls and short $405 January 2026 Microsoft calls. The Motley Fool has a disclosure policy.

1 Vanguard ETF that could rise 37.1% before the end of 2024, according to a select Wall Street analyst was originally published by The Motley Fool