Market Insights on Small-Cap Stocks
Eddie Gaboul, CEO of Key Advisors Wealth Management, foresees a market correction this summer after a significant rise in tech stocks. He suggests that investors brace for potential volatility and stay alert for buying opportunities.
When discussing key stock indexes, most people think of the S&P 500, Nasdaq Composite, or Dow Jones. These are often referred to as the “big three.” However, there’s another important index called the Russell 2000, which tracks the smallest 2,000 companies from the Russell 3000 index.
The Russell 2000 is essentially to small-cap stocks what the S&P 500 is to large-cap stocks. So far this year, exchange-traded funds (ETFs) like the Vanguard Russell 2000 ETF have outperformed all of the major indexes. If you have $1,000 to invest, this ETF could be a valuable addition to your portfolio in the long term.
Why Small-Cap Stocks?
Investing in small-cap stocks—defined as companies with market caps between $250 million and $2 billion—typically involves more risk but can offer higher rewards compared to larger firms.
ETF assets are rapidly increasing, contrasting with traditional investment trusts in some notable ways.
Smaller companies usually exhibit greater sensitivity to broader market trends and economic conditions, including interest rates, which can introduce greater volatility. Yet, their smaller size also primes them for more significant growth potential. In theory, it’s easier for a market cap of $500 million to double than it is for a $500 billion company to achieve similar growth.
Role of ETFs for Retirement
A small-cap stock doesn’t always resemble a start-up; it could be an established firm in a niche market. The VTWO ETF, for example, grants access to 1,957 small-cap stocks across various sectors, making it a comprehensive option for those interested in small-cap investing.
VTWO’s Performance Over Time
As of market close on June 5th, VTWO saw a rise of 13.2%, marking one of its stronger starts in recent years. While these yearly gains are impressive, it’s crucial to consider long-term performance too. Here’s how VTWO compares to the major indexes over the years:
| ETF or index | Year-to-date revenue | 3-year annual average | 5-year annual average | 10-year annual average |
| VTWO | 13.2% | 15.2% | 4.4% | 9.3% |
| S&P 500 | 7.7% | 19.9% | 11.8% | 13.4% |
| Nasdaq Composite | 10.7% | 24.7% | 13.2% | 17.9% |
| Dow Jones | 5.1% | 14.9% | 7.9% | 11% |
VTWO hasn’t consistently screamed “invest in me,” but its main advantage lies in offering diversification rather than depending on a few tech giants for the bulk of its earnings.
While I don’t intend to allocate a significant portion of my portfolio to VTWO—keeping it under 10%—having some exposure could really help tap into growth opportunities, especially during periods when small-cap stocks tend to shine. If you feel the time is right to shift away from big tech, adding smaller companies could be beneficial.
