What To Buy After You Sell The Russell 2000

Core Viewpoint - There is a strong argument for investing in small cap stocks currently, but a recommendation to exit the Russell 2000 and related ETFs due to underperformance and seasonal factors is emphasized [2][8]. Group 1: Small Cap Stocks vs. Large Cap Stocks - Anticipated easing by the Federal Reserve may benefit small cap stocks more than large caps [2]. - Small caps have historically underperformed large caps over the past five years, suggesting a potential for mean reversion [2]. - The recent tech rally has disproportionately favored large cap indices like the S&P 500, indicating a possible slowdown [2]. Group 2: Performance Metrics - From 2016 to 2023, the Russell 2000 underperformed the S&P 500 by 28.4% during the months of May to August [2]. - Year-to-date returns show the Russell 2000 at 10.16%, while the S&P 500 has higher returns [3]. - Over the past year, the Russell 2000 has returned 27.88%, compared to 15.93% for the S&P 600 [3]. Group 3: Comparison of Small Cap Indices - The Russell 2000 has the largest company market cap at $46 billion, while the S&P 600's largest is $7 billion [5]. - The Russell 2000 has no restrictions on IPOs, leading to a more volatile composition compared to the S&P 600 and CRSP [5]. - The S&P 600 requires positive earnings for inclusion, which may lead to stronger balance sheets compared to the Russell 2000 [5][9]. Group 4: Recommended ETFs and Funds - IWM, which tracks the Russell 2000, is recommended for exit, while IJR (S&P 600) and VB (CRSP) are suggested alternatives [6][8]. - AVUV, an actively managed small cap value ETF, has shown superior returns compared to the Russell 2000 Value Index [6][7]. - DFSV, another actively managed ETF, has also performed well but is recommended to be less favorable than AVUV [7]. Group 5: Conclusion - Investors should consider switching from Russell 2000 tracking investments to alternatives like IJR, VB, or AVUV based on their investment preferences and market outlook [8].