Market correction expected this summer, analyst says Eddie Ghabour, CEO of Key Advisors Wealth Management, anticipates market corrections this summer after a rapid rise in technology stocks, advising investors to prepare for choppy trading and look for buying opportunities.
When most people think of big sotck exchange indices, their minds turn to the S&P 500, the Nasdaq Composite or the Dow Jones because they are part of the “Big 3”. One index that often goes unnoticed is the Russell 2000, which tracks the 2,000 smallest companies in the Russell 3000 index.
The Russell 2000 is small cap actions how the S&P 500 compares to large-cap stocks, and so far this year, ETFs like the Vanguard Russell 2000 ETF have outperformed all of the “Big 3” indexes. If you have $1,000 to invest, this could be a great addition to your long-term portfolio.
Why invest in small cap stocks? Investing in small-cap stocks – which are generally classified as companies with market capitalizations between $250 million and $2 billion – generally represents a higher risk/reward tradeoff than investing in larger companies.
Teleprinter Security Last Change Change % VTWO VANGUARD SCOTTSDALE FONDS VANGUARD RISS200IDX FD ETF 116.81 +2.86 +2.51% ETF ASSETS ARE ON THE RISE. HERE’S HOW THEY DIFFER FROM MUTUAL FUNDS
US stocks are near record highs, as are metals including silver and gold. (Michael M. Santiago/Getty Images / Getty Images)
On the one hand, their smaller size generally means they are more responsive to a broader market and economic conditions (like interest rates) and are more volatile. On the other hand, their small size leaves much more room for growth. It doesn’t always happen that way, but in theory it’s much easier to double a valuation from $500 million to $1 billion than from $500 billion to $1 trillion.
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Small cap also doesn’t always mean a new start-up type business. It may be a well-established business operating in a niche. Either way, VTWO gives you access to 1,957 small-cap stocks from every major sector. This is truly a one-stop shop for small-cap stocks.
How has VTWO performed over the years?Through the market close on June 5, VTWO is up 13.2%, marking one of its best starts to a year in some time. And while the gains this year are impressive, it’s important to step back and look at longer-term performance as well. Here is VTWO’s performance over the years compared to the “Big 3” indices:
ETF or indexReturns since the start of the yearAnnualized average over 3 yearsAnnualized average over 5 yearsAnnualized average over 10 yearsVTWO13.2%15.2%4.4%9.3%S&P5007.7%19.9%11.8%13.4%Nasdaq Composite10.7%24.7%13.2%17.9%Dow Jones5.1%14.9%7.9%11%Source: YCharts. Table by author. Cumulative returns based on market close on June 5.
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VTWO’s underperformance over the years doesn’t really mean “invest in me,” but its main goal is to diversify and cover more ground, rather than letting the bulk of your returns rest on a handful of technology giants like the actions of the “Magnificent Seven”.
I wouldn’t make VTWO the majority of your portfolio (aim for less than 10%), but having some exposure is a great way to tap into growth potential while setting your portfolio up to have a winner in a time when small-cap stocks typically outperform the market (like now). If you think big tech is due for a decline, now is a good time to add a few smaller companies to your portfolio.
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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has no position in any of the securities mentioned. The Motley Fool has a disclosure policy.
