Core Insights - Wall Street experienced a mixed start to 2026, with the S&P 500 rising 0.2%, the Dow Jones Industrial Average increasing by 0.7%, while the Nasdaq fell by 0.3%. The small-cap Russell 2000 index outperformed with a 1.1% gain [2] Small-Cap Stocks Outlook - The early strength in small-cap stocks may signal the potential return of the "January Effect," where smaller companies' stock prices typically rise more in January due to year-end tax-loss selling [3] - Several macroeconomic factors are expected to support small-cap stocks in 2026, beyond the January seasonal pattern [5] Catalysts for Small-Cap Rally - **Favorable Macroeconomic Outlook**: Easing interest rates are anticipated to enhance small-cap stock performance, with Goldman Sachs highlighting compelling opportunities driven by expected rate cuts and accelerating earnings [6] - **Attractive Relative Valuations**: U.S. small caps are trading at a 26% discount to large caps, near historic lows, while international small caps are at an 8% discount despite higher forward earnings growth [7] - **Domestic Economic Advantages**: Small-cap companies benefit more from domestic revenue sources, positioning them favorably amid trends like reshoring and infrastructure development [8] - **AI as a Beneficiary**: Small caps may gain disproportionately from AI-driven productivity improvements, leading to larger percentage earnings growth compared to large caps [9] - **Increased Market Activity**: A rise in mergers and acquisitions (M&A) and a recovering IPO market in 2026 could create significant returns and validate small-cap valuations [10] Investment Strategy: ETFs vs. Individual Stocks - Investors may prefer small-cap ETFs for exposure due to the diversification they offer across over 2,000 companies, mitigating risks associated with individual stocks [11][12] Recommended Small-Cap ETFs - **Vanguard Russell 2000 ETF (VTWO)**: Offers exposure to 1,989 U.S. small-cap stocks, with a 12.2% increase over the past year and net assets of $13.7 billion [14][15] - **iShares Russell 2000 ETF (IWM)**: Provides exposure to 1,959 small public U.S. companies, gaining 12% over the past year with net assets of $74.42 billion [16][17] - **Vanguard Small-Cap ETF (VB)**: Covers 1,331 small-cap companies, with an 8.8% rise over the past year and net assets of $68.9 billion [18][19]

Core Insights - Recent market conditions have made certain stocks, particularly dividend stocks, more attractive as they have pulled back from recent highs [1] - ETFs are a significant focus in investment strategies, with plans to allocate a larger portion of retirement contributions to them in 2026 [2] Small Cap Stocks - Small cap stocks are currently trading at their lowest valuations relative to large caps since the 1990s, with the Russell 2000 small-cap index averaging a price-to-book ratio of 2.0 compared to 5.2 for the S&P 500 [4] - Lower interest rates in 2026 could favor small cap outperformance, as smaller companies typically rely more on debt [5] Real Estate Investment Trusts (REITs) - The real estate sector has underperformed over the past decade, but there are attractive opportunities in REITs, with the Vanguard Real Estate ETF (VNQ) expected to perform well in 2026 [6] - VNQ offers a 4% dividend yield and provides exposure to major real estate operators like Prologis and Digital Realty Trust [8] Artificial Intelligence ETFs - The Ark Autonomous Technology & Robotics ETF (ARKQ) focuses on smaller AI stocks and is actively managed, with Tesla being the top holding [11][12] - This ETF allows investors to gain exposure to smaller AI companies without extensive research, making it an appealing option for those less familiar with the sector [13] Investment Strategy - The discussed ETFs represent different components of a diversified investment strategy, with a focus on long-term holdings and exposure to emerging sectors [13][14] - The three highlighted ETFs are considered particularly attractive as the market heads into 2026, with plans to add shares to portfolios soon [14]

Core Insights - Growth ETFs are positioned for significant growth, offering diversification and exposure to high-potential stocks, which can limit risk while capitalizing on growth opportunities [1][16] Group 1: Vanguard Russell 2000 ETF - The Vanguard Russell 2000 ETF contains 1,992 holdings, primarily small-cap stocks, which are defined as having a market capitalization of approximately $300 million to $2 billion, providing potential for explosive growth [3][4] - The ETF has achieved an average annual return of 9.18% over the last 10 years, suggesting that a $200 monthly investment could grow to around $209,000 after 25 years [6] - Approximately 20% of the fund is allocated to the industrials sector, ensuring diversification across various industries, which helps mitigate risk [5] Group 2: iShares Future AI and Tech ETF - The iShares Future AI and Tech ETF focuses on companies advancing AI technology, including software and infrastructure, with a total of 48 holdings, making it less diversified but highly targeted [7][8] - Despite its average return of 8.07% over the last five years, the ETF has seen a remarkable 33.77% return in the past 12 months, indicating potential for substantial growth in the AI sector [11] - The fund is considered riskier due to its smaller portfolio and the inherent volatility of the AI sector, as well as being a newer fund launched in 2018 [10] Group 3: Vanguard Information Technology ETF - The Vanguard Information Technology ETF includes 314 stocks from various technology sectors, with top holdings in major companies like Nvidia, Apple, and Microsoft [12][13] - This ETF has delivered a higher-than-average return of 22.18% per year over the last 10 years, suggesting that a $200 monthly investment could accumulate around $1.6 million after 25 years [15] - The ETF provides a balanced approach to tech exposure, focusing on large-cap stocks to help limit risk associated with the volatility of the tech sector [13]

Core Viewpoint - Small-cap U.S. stocks are showing signs of a potential comeback after a prolonged period of underperformance, with recent data indicating positive trends for investors in this segment [1] Group 1: Market Performance - The iShares Russell 2000 ETF (IWM) has gained approximately 28% over the past six months, outperforming the SPDR S&P 500 ETF Trust (SPY), which saw a 23% increase [1] - The Russell 2000 index surpassed the 2,500 mark for the first time, indicating a significant milestone for small-cap stocks [1] Group 2: Economic Factors - Early-year weakness in small-cap stocks was largely attributed to President Trump's announcement of higher tariffs, which adversely affected smaller companies [2] - The annual inflation rate in the U.S. rose to 3% in September 2025, up from 2.9% in August, which may influence the Federal Reserve's monetary policy [3] - The Federal Reserve has already implemented its first rate cut of 2025 and is expected to consider additional cuts, which could benefit small-cap stocks [4][5] Group 3: Trade Relations - Recent easing of trade tensions, including potential trade deals with China and India, may provide a favorable environment for small-cap stocks [6] Group 4: Valuation Metrics - The Russell 2000 is currently trading at a P/E ratio of 34.32, an increase from 29.87 a year ago, indicating that small-cap stocks are not necessarily undervalued [7] - In comparison, the Nasdaq 100 Index has a P/E ratio of 33.25, while the S&P 500 Index stands at 25.58, suggesting that small caps are relatively more expensive [8] Group 5: Top Performing Small-Cap ETFs - Fidelity Enhanced Small Cap ETF (FESM) has shown a six-month performance increase of 31.49% with an AUM of $2.85 billion [10] - Vanguard Russell 2000 ETF (VTWO) has increased by 29.4% over six months, with an AUM of $13.3 billion [10] - Other notable ETFs include Federated Hermes MDT Small Cap Core ETF (FSCC) with a 31.7% increase and Global X Russell 2000 ETF (RSSL) with a 29.2% increase [11]

Core Insights - The article discusses the performance comparison between the S&P 600 and the Russell 2000, emphasizing the impact of profitability on investment returns [11][28]. - It highlights that the S&P 600, which requires companies to be profitable, has consistently outperformed the Russell 2000, which includes a significant number of unprofitable firms [10][14][28]. Group 1: Performance Comparison - The S&P 600 has shown better performance over various time frames compared to the Russell 2000, with most one-year, five-year, and ten-year rolling returns favoring the S&P 600 [14][19][22]. - Historical data indicates that investing in the S&P 600 for any ten-year period over the past 31 years would yield positive returns [26][28]. - The S&P 600's requirement for positive GAAP earnings contributes to a higher quality of aggregate earnings and cash flow, leading to improved returns [28][30]. Group 2: Investment Strategy - A systematic investment strategy that focuses on high profitability stocks can yield better returns compared to a strategy that includes low or non-profitable stocks [5][11]. - The article suggests that a diversified basket of profitable stocks can provide stable cash flow and high yield, akin to a long-term fixed income investment [7][8]. - The performance of the Russell 2000 is negatively impacted by its higher proportion of unprofitable companies, which dilutes overall returns [10][14].

Core Insights - The Federal Reserve's anticipated shift towards lower interest rates in September 2025 is expected to benefit small-cap companies by reducing their borrowing costs and improving equity valuations [1][4][14] - The iShares Russell 2000 ETF (IWM), which tracks approximately 2,000 small-cap companies, has shown strong performance, surging 7% in August 2025 and reaching an all-time high in September 2025 [4][14] - The IWM's broad sector exposure, particularly in financials, healthcare, and industrials, offers diversification benefits compared to large-cap indices that are heavily weighted in technology [3][14] Interest Rate Impact - A 90% probability of a quarter-point interest rate cut in October 2025 is indicated by the CME FedWatch Tool, which is expected to disproportionately benefit smaller firms with higher growth potential [1][14] - Lower interest rates decrease the discount rate on future cash flows, enhancing the attractiveness of small-cap stocks [1] Market Dynamics - The annual reconstitution of the Russell 2000 Index, which will become semi-annual starting in 2026, allows for better responsiveness to market conditions and potential shifts towards small-cap stocks [2][14] - The IWM's performance has been narrowing the gap with the S&P 500 year-to-date, driven by macroeconomic shifts and undervaluation [4][14] Seasonal Trends - Historical data indicates that October and November are traditionally strong months for stock performance, with the Russell 2000 closing higher on November 25 than on September 30 in 13 of the past 15 years, reflecting an 87% occurrence rate [9][11][15] - Traders are encouraged to monitor seasonal patterns and consider them alongside technical and fundamental analysis for optimal market entry points [10][16] Trading Opportunities - Various trading assets are available for capitalizing on the IWM's performance, including the iShares Russell 2000 ETF (IWM), Vanguard Russell 2000 ETF (VTWO), and futures contracts [8][15] - The IWM's median market cap of less than $1 billion helps mitigate concentration risk, making it an attractive option for traders seeking broader market exposure [3][14]

Group 1: Small-Cap Market Momentum - The small-cap space has shown momentum recently, with the iShares Russell 2000 ETF (IWM) gaining nearly 3% over the past week, outperforming the broad market fund (SPY) which gained 1% [1] - Anticipated Fed rate cuts are contributing to this momentum, with futures markets pricing in a 94% chance of a quarter-point cut at the next Fed meeting, up from 85% before the latest inflation data [2] - Small-cap companies, which typically have a higher debt burden at floating rates, will benefit from lower borrowing costs, aiding their expansion and profitability [3] Group 2: Valuation and Investment Opportunities - The Russell 2000 has underperformed the S&P 500 year-to-date, with a gain of just 1.5% compared to 9.6%, potentially providing an advantageous entry point for investors [4] - Small-caps are currently trading at a discount compared to large-caps, attracting institutional investors who are rotating out of crowded mega-cap trades into undervalued small-cap segments [5] Group 3: Business Sentiment and Economic Indicators - Optimism among small business owners increased in July, with the small business optimism index rising to 100.3, the highest since February and above the 52-year average of 98, indicating a stabilizing business environment [6] - Trends in reshoring and onshoring favor small-cap firms, as companies bring supply chains back to the U.S. amid global supply chain vulnerabilities [7] Group 4: M&A Activity and Market Dynamics - Dealmaking is increasing in sectors like healthcare, biotech, and tech services, with large-cap companies targeting small and mid-sized firms for growth, which historically favors small companies [8] - The broadening market breadth, where gains are spreading more evenly across the market, signals healthier market dynamics and could catalyze small-cap outperformance [10] Group 5: Investment Vehicles - Several ETFs in the small-cap space have a strong Zacks ETF Rank 1 (Strong Buy) or 2 (Buy), indicating potential outperformance in the coming weeks, including iShares Core S&P Small-Cap ETF (IJR) and Vanguard Small-Cap ETF (VB) [11]

Group 1 - Small-cap stocks have been largely overlooked but may see a resurgence due to favorable market conditions [1][2] - The Russell 2000 index produced an 11.5% total return in 2024, underperforming the S&P 500, which returned 25% [1][2] - The valuation gap between small-cap and large-cap stocks is at its widest in 25 years, with small caps trading at a P/B ratio of 1.8 compared to the S&P 500's 4.9 [4][5] Group 2 - The Federal Reserve's anticipated interest rate cuts, which are expected to total five over the next year, could benefit small-cap stocks significantly [6][7] - Lower interest rates are favorable for small caps due to their higher reliance on debt and the potential influx of investment as risk-free rates decline [7] - The regulatory environment under the previous administration may have provided small caps with competitive advantages [8] Group 3 - There is a bold prediction that the Vanguard Russell 2000 ETF could rise by 50% over the next 12 months, contingent on favorable market conditions [4][9] - Despite the challenges, small-cap stocks are expected to deliver excellent long-term returns, making it a potentially opportune time for investors to consider [9]

Core Insights - Small-cap stocks present a significant growth potential compared to large-cap stocks, as many large-cap stocks began as small caps [1] - Falling interest rates are expected to benefit small-cap stocks disproportionately due to their higher reliance on debt, potentially lowering borrowing costs and attracting investment into more speculative companies [2] - Investing in small-cap stocks can be challenging, making index funds like the Vanguard Russell 2000 ETF a viable option for exposure [3] Valuation Analysis - There is a notable valuation gap between small caps and large caps, with small caps trading at their lowest price-to-book valuations relative to large caps since the late 1990s [5] - As of the current analysis, the average stock in the Russell 2000 trades at 1.8 times book value, while the average S&P 500 component trades at 5.0 times book value, indicating a significant disparity [6] - The earnings growth of large caps, particularly in the tech sector, has not been sufficient to justify the large valuation gap [6] Investment Strategy - Accumulating shares of the Vanguard Russell 2000 ETF is a strategy being employed to capitalize on the potential for small-cap outperformance in a falling interest rate environment [7]

Core Insights - The Vanguard Russell 2000 ETF (VTWO) is a passively managed ETF launched on September 22, 2010, with over $12.82 billion in assets, making it one of the largest in the Small Cap Blend segment of the US equity market [1] Group 1: Small Cap Blend Overview - Small cap companies have market capitalizations below $2 billion and typically present higher potential and risk compared to large and mid-cap companies [2] - Blend ETFs combine both growth and value stocks, showcasing characteristics of both investment styles [2] Group 2: Cost Structure - VTWO has an annual operating expense ratio of 0.07%, positioning it as one of the least expensive ETFs in its category [3] - The ETF offers a 12-month trailing dividend yield of 1.24% [3] Group 3: Sector Exposure and Holdings - The ETF has a significant allocation to the Financials sector, comprising approximately 18.7% of the portfolio, followed by Industrials and Healthcare [4] - Individual holdings include Slbbh1142 at 1.78% of total assets, with Credo Technology Group Holding Ltd (CRDO) and Fabrinet (FN) also notable [5] Group 4: Performance Metrics - VTWO aims to match the performance of the Russell 2000 Index, with a year-to-date return of approximately 0.52% and a one-year return of about 10.63% as of August 6, 2025 [6] - The ETF has traded between $70.56 and $98.06 over the past 52 weeks [6] Group 5: Risk Assessment - VTWO has a beta of 1.11 and a standard deviation of 22.18% over the trailing three-year period, categorizing it as a medium-risk investment [7] - The ETF holds around 2004 assets, effectively diversifying company-specific risk [7] Group 6: Alternatives - VTWO holds a Zacks ETF Rank of 2 (Buy), indicating favorable expected returns, low expense ratios, and positive momentum [8] - Other comparable ETFs include the Vanguard Small-Cap ETF (VB) with $64.50 billion in assets and an expense ratio of 0.05%, and the iShares Core S&P Small-Cap ETF (IJR) with $80.56 billion in assets and an expense ratio of 0.06% [9][10] Group 7: Market Trends - There is a growing trend among retail and institutional investors towards passively managed ETFs due to their low costs, transparency, flexibility, and tax efficiency, making them suitable for long-term investment strategies [11]