Core Insights - The Russell 2000 serves as the primary benchmark for small-cap investments, demonstrating strong performance in favorable market conditions [1] - The Vanguard Russell 2000 ETF is highlighted as a cost-effective option for investors, with a low expense ratio of 0.06% and a strategy of holding all stocks in the index [2] - The index comprises approximately 2,000 stocks with market caps ranked between 1,001 and 3,000, including both profitable and unprofitable companies [4] Investment Environment - In bull markets, unprofitable stocks within the Russell 2000 can outperform as investors are more inclined to take risks on speculative companies [5] - Long-term investment cycles benefit from exposure to both high-quality and lower-quality companies, allowing investors to navigate market fluctuations effectively [5][9] Comparison with Other Indexes - The S&P 600 index, which is linked to funds like the iShares Core Small Cap ETF, includes stocks outside the S&P 500 and S&P MidCap 400, but applies a quality screen requiring positive earnings [8] - The S&P 600 is tilted towards larger and higher-quality companies, making it a potentially less risky option compared to the Russell 2000 [8] Conclusion - The Vanguard Russell 2000 ETF is considered the best option for long-term investors due to its comprehensive exposure to the small-cap market and its inclusive nature compared to alternative indexes [9]

Market Overview - Investors are shifting focus beyond technology for the first time in over three years, with energy and consumer staples emerging as top-performing sectors in 2025 [1] - Value and dividend stocks are experiencing a resurgence, while international equities have shown significant growth since the start of 2025 [1] Small Caps Performance - Small-cap stocks, previously overlooked, are gaining attention due to their limited exposure to technology and appealing valuations [2] - The Russell 2000 index, a benchmark for small caps, is attracting analysts' interest with notable price targets [2] Investment Case for Vanguard Russell 2000 ETF - The Vanguard Russell 2000 ETF (NASDAQ: VTWO) has a projected 25% upside over the next 12 months according to the ETF Action database [3] - The investment case for this fund is being analyzed as it heads into the latter part of 2026 [3] Small Caps vs. Megacaps - Small caps are becoming more attractive as megacaps face concentration risk, with the "Magnificent Seven" stocks declining over 10% from their all-time highs [7] - The current market environment is favoring small caps due to valuation concerns regarding megacaps and potential rate cuts [9] Earnings Growth and Valuation - The Russell 2000 is projected to grow earnings by 19% in 2026, compared to a 13% growth forecast for the S&P 500 [9] - The Vanguard Russell 2000 ETF has a price/earnings (P/E) ratio of 18, significantly lower than the 28 P/E ratio of the Vanguard S&P 500 ETF [9] Interest Rates Impact - Small companies are likely to benefit from lower interest rates, as many carry higher debt loads [8] - While current expectations for rate cuts are modest, any unexpected economic changes could prompt the Federal Reserve to consider more aggressive rate cuts [8]

The S&P 500 (SNPINDEX: ^GSPC) is one of the most widely followed stock market indexes. It hosts a diversified group of 500 of America's largest publicly listed companies, and its top holdings include all of the trillion-dollar giants leading the artificial intelligence (AI) revolution. Then there is the Russell 2000 index, which is home to approximately 2,000 of the smallest companies listed on U.S. stock exchanges. Many of these companies are benefiting from a series of political and economic tailwinds r ...

Core Viewpoint - The Vanguard Russell 2000 ETF was initially expected to outperform the S&P 500 in 2025, but the S&P 500 delivered a higher return due to the AI surge [1][2]. Group 1: Investment Thesis - Small-cap stocks were trading at their greatest valuation gap relative to large caps in over 25 years, with a price-to-book ratio of 2.1 for Russell 2000 components compared to 5.0 for S&P 500 companies [3]. - Falling interest rates generally favor smaller companies, as they are more reliant on borrowed money, leading to increased investment in riskier assets like small-cap stocks [4]. Group 2: Current Outlook - Despite the S&P 500's outperformance, a 13% return for the Vanguard Russell 2000 ETF is considered solid historically, and the ETF is viewed as a long-term investment [5]. - The valuation gap between small caps and large caps has widened further, suggesting potential for small caps to outperform in the coming decade, similar to trends observed during the dot-com boom [6]. - Experts anticipate that interest rates will continue to trend lower, and regulatory support from the Trump administration may benefit small-cap companies [7].

Core Viewpoint - Small-cap stocks, represented by the Russell 2000 index, have started 2026 strongly, outperforming the S&P 500 by over 8% year to date, suggesting a potential resurgence in this market segment [1][2]. Group 1: Market Performance - The Russell 2000 index has not outperformed the S&P 500 in a full calendar year since 2020, indicating a long-term trend that may be reversing [2]. - The Vanguard Russell 2000 ETF has a price-to-earnings ratio of 17.5, suggesting that there is significant value to be unlocked in small-cap stocks [2]. - The early part of 2026 shows a rotation from tech stocks to cyclicals, benefiting sectors like industrials, energy, and materials, which aligns well with small-cap performance [5][6]. Group 2: Sector Composition - The Vanguard Russell 2000 ETF's top three sector exposures are industrials, healthcare, and financials, with technology being a smaller component at around 12% [6]. - This sector composition allows small-caps to potentially benefit from economic growth without the premium valuations associated with tech stocks [5][6]. Group 3: Investment Risks - Approximately 40% of companies in the Russell 2000 are unprofitable, which poses a risk during market corrections or earnings downturns [7]. - While current economic indicators appear strong, a significant slowdown in the labor market raises concerns about the sustainability of small-cap performance [8].

Group 1: Small-Cap Market Dynamics - The small-cap benchmark, tracked by the iShares Russell 2000 ETF, has reached record highs this month, outperforming large-cap indices, indicating a potential shift in market leadership [1][2] - The macro and fundamental case for U.S. small caps remains strong, supported by long-term structural forces rather than short-term positioning [2] - Small-cap earnings revisions are outpacing historical norms and those of mid- and large-cap stocks, suggesting a robust growth outlook inconsistent with a late-cycle slowdown [5] Group 2: Productivity and Financial Conditions - Strong productivity growth allows for above-trend growth without causing inflation, enabling the Federal Reserve to maintain easy financial conditions [3] - The current market environment allows for a focus on labor market and services inflation data as key determinants of policy risk, with geopolitical volatility being treated as opportunities to add risk [4] Group 3: Regional Banks and Financial Fundamentals - Regional banks have shown solid fundamentals this quarter, contributing positively to small-cap performance, with attractive relative valuations [7] - There has been a notable absence of discussions about credit health during earnings calls, indicating a stable outlook for regional banks [8] Group 4: Artificial Intelligence Adoption - The adoption of artificial intelligence is expected to be a significant catalyst for small caps, particularly as it expands beyond software into physical products [9] - The integration of AI into physical products is anticipated to be a major investment theme in 2026, with sectors like power providers, semiconductors, and tech hardware being primary beneficiaries [10] - AI adoption could help small caps close margin gaps that have historically favored large caps, indicating a potential for re-rating in the small-cap sector [11]

Group 1 - The importance of diversification in investment is emphasized, suggesting that a well-rounded portfolio should include a variety of stocks to mitigate risk [1] - Exchange-traded funds (ETFs) are highlighted as an effective way to achieve diversification, allowing investors to invest in multiple companies with a single investment [2] Group 2 - The Vanguard S&P 500 ETF (NYSEMKT: VOO) is recommended as a top investment due to its diversification, low expense ratio of 0.03%, and historical long-term returns of around 10% annually [4][6] - The S&P 500 includes companies from various sectors, making it a reflection of the U.S. economy's growth, despite its recent concentration in large tech stocks [5] - The Vanguard Russell 2000 ETF (NASDAQ: VTWO) focuses on small-cap stocks, which can offer higher growth opportunities but also come with increased risk due to their susceptibility to economic conditions [7][8]

Core Insights - The article discusses the potential for index ETFs to be a significant part of an investor's portfolio, particularly focusing on small-cap, value, and growth ETFs for 2026 [1] Small-Cap ETFs - There is an increasing belief that small-cap stocks will outperform in 2026, following a period of strong performance over the past six months, despite trailing large-cap stocks previously [2][3] - The Federal Reserve's anticipated rate cuts are expected to benefit small-cap companies more significantly, as lower borrowing costs can stimulate domestic demand [3] Value ETFs - The market has seen growth stocks lead, but there is speculation that 2026 could be the year for value stocks to outperform due to investor nervousness and potential economic benefits from lower rates and tariff reversals [5][6] - Recommended value ETFs include the Vanguard 500 Value ETF and the Schwab U.S. Dividend Equity ETF, which focus on value stocks and companies with strong financials and dividend histories [7] Growth ETFs - Large-cap growth stocks have been dominant in the market, particularly those associated with AI, and this trend may continue as AI technology develops [8] - Key growth ETFs include the Vanguard Growth ETF, Vanguard Mega Cap Growth ETF, and Invesco QQQ ETF, which have shown strong performance relative to the broader market [9] Investment Recommendations - The Vanguard Mega Cap Growth ETF is highlighted as a top choice for 2026, given its concentration in leading AI stocks, which are expected to continue driving market performance [12]

Core Insights - The Vanguard Russell 2000 ETF has underperformed the S&P 500 over the past decade, generating a total return of 148% compared to the S&P 500's 295% [7][8] - The ETF provides broad diversification, with its largest holding accounting for only 0.74% of the portfolio, minimizing the impact of any single stock's performance [6] - Valuation metrics suggest that the Russell 2000 may be undervalued compared to the S&P 500, with a price-to-earnings ratio of 18.3 versus 28.9 for the S&P 500 [9] ETF Performance - The Vanguard Russell 2000 ETF has generated a total return of 148% as of October 21, 2023, meaning a $10,000 investment in October 2015 would be worth $24,760 today [7] - The ETF has an expense ratio of 0.07%, which is low and allows investors to retain more capital over time [8] Sector Exposure - The top sector in the Vanguard Russell 2000 ETF is industrials, which makes up 18.9% of the portfolio, contrasting with the S&P 500's 34.8% allocation to information technology [4] Market Conditions - Small-cap stocks, represented by the Russell 2000, are often seen as a bet on the overall U.S. economy, and potential interest rate cuts by the Federal Reserve could serve as a catalyst for these stocks [10] Investment Strategy - While the Vanguard Russell 2000 ETF may not be the primary investment vehicle, it could be a valuable component of a diversified portfolio, providing exposure to small-cap stocks without overly concentrating assets [13]

Core Insights - The S&P 500 and Nasdaq are nearing all-time highs, with many popular stocks and ETFs appearing expensive, particularly mega-cap technology stocks [1] - There are still relatively cheap areas in the market, specifically small-cap stocks and real estate investment trusts (REITs), which may present investment opportunities for long-term investors [2] Small-Cap Stocks - The Vanguard Russell 2000 ETF tracks the performance of the Russell 2000 index, which consists of 2,000 small-cap companies with a median market cap of $3.4 billion [4] - The ETF is highly diversified, with no single stock accounting for more than 0.74% of its assets, making it a suitable option for investors seeking exposure to smaller companies [4] Real Estate Investment Trusts (REITs) - The Vanguard Real Estate ETF invests in an index of REITs that own various types of commercial real estate, including retail properties and data centers [5] - This ETF is more concentrated, with the 10 largest holdings comprising 39% of total assets, indicating that some REITs are significantly larger than the average in the sector [6] - The Vanguard Real Estate ETF is designed as an income investment, offering a yield of nearly 4% through dividends passed from its components [6] Investment Timing - The current valuation gap between small-cap and large-cap stocks, along with a likely falling-rate environment, could favor small-cap stocks and rate-sensitive sectors like real estate [9] - Both the Vanguard Russell 2000 ETF and the Vanguard Real Estate ETF are positioned as attractive entry points for long-term investments [8]