Funds tracking the Russell 2000 index have been a mainstay for investors for years, giving them the opportunity to own a little piece of 2,000 U.S.-based small-cap companies. At times, the index has outperformed the S&P 500 during periods of rapid economic expansion.
One of the best avenues for investing in the index has been through the Vanguard Russell 2000 ETF (VTWO -1.05%) because of its large size and low expense ratio of just 0.07%.
But is the Vanguard Russell 2000 ETF the right investment for you right now? Here's what you should know.
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The case for buying the Vanguard Russell 2000 ETF now
Russell 2000 exchange-traded funds are appealing to many investors because they give them a chance to easily diversify their portfolio. Because the funds track the Russell 2000, shareholders have exposure to 2,000 small companies, many of them trying to out-innovate and disrupt much larger rivals.
Each large-cap company started out as a small upstart, so it's easy to imagine how getting in on the ground floor of some small disruptors could be a good long-term investment strategy.
What's more, the Russell 2000 has had periods of growth that far outpaced the S&P 500's gains. The Russell 2000 rose by 150% from 2009 to 2014, while the S&P 500 increased by 130% in that time frame. Those returns came after the Great Recession, as smaller companies were able to eke out more gains following a very difficult economic time.
That's one advantage of investing in the Vanguard Russell 2000 ETF: The share prices of small-cap companies tend to bounce back faster after tough economic times than larger ones. That proved true during the COVID recovery as well, then the Russell 2000 rose faster in response to the federal government's stimulus than the S&P 500 did.
Why some investors may be better off putting their cash elsewhere
One of the drawbacks of investing in the Vanguard Russell 2000 ETF lately has been that it's mostly missing out on the artificial intelligence boom. While some small companies are benefiting from AI, most of the recent gains in the market have come from large companies making big moves in hardware and software, including Nvidia and Microsoft.
This is one of the reasons why the S&P 500 is up about 66% over the past three years, while Vanguard's Russell 2000 fund has gained just 23%. Large tech companies are investing hundreds of billions of dollars into AI right now, and it's fueling a boom in data center infrastructure, cloud computing, data analytics, and AI agents that are collectively worth trillions of dollars. That's simply too big of an opportunity to pass up right now for most investors.
Although this Vanguard fund has occasionally outperformed the S&P 500, its focus on smaller companies means it will almost always be more volatile than the broader market. At a time when AI is booming and there's a lot of uncertainty surrounding tariffs and the economy, putting your money into the Vanguard Russell 2000 ETF may not be as wise a move as investing in an S&P 500 ETF.
I'll end with another caveat. If you believe the economy is headed for a slowdown soon, having some money in Vanguard's Russell 2000 ETF could be smart. Diversifying your investments is almost always a good idea, and if you're overexposed to larger companies or have too much invested in AI stocks, then spreading your portfolio investments around a bit more might help you weather economic bumps down the road.
