The S&P 500 (^GSPC -0.25%) has had a good year, up nearly 13% through Aug. 27. That's above its long-term average, and if it continues through the year, it'll be its fourth consecutive year of double-digit returns.
Although much attention is given to the S&P 500, the iShares Russell 2000 ETF (IWM -1.35%), which mirrors the Russell 2000 index, has slipped under the radar while returning 21.5% this year. It's off to its best start since 2021, but that doesn't mean the momentum is stopping. Investors still have time to add it to their portfolios.
NYSEMKT: IWM
Key Data Points
Diversification is working in IWM's favor
What the S&P 500 is to large-cap stocks, the Russell is to small-cap stocks. IWM holds 1,962 small-cap stocks covering all 11 major U.S. sectors. Here is how the distribution compares to the S&P 500:
| Sector | IWM Percentage | S&P 500 Percentage |
|---|---|---|
| Healthcare | 21.07% | 9.10% |
| Financials | 18.97% | 12.50% |
| Industrials | 13.93% | 8.70% |
| Information technology (tech) | 12.75% | 36.60% |
| Consumer discretionary | 9.24% | 9.40% |
| Energy | 6.49% | 3.40% |
| Real estate | 5.76% | 1.90% |
| Materials | 4.35% | 1.80% |
| Utilities | 2.73% | 2.10% |
| Communication services | 2.37% | 9.90% |
| Consumer staples | 1.97% | 4.70% |
Sources: iShares and Vanguard. IWM percentages as of Aug. 26; S&P 500 percentages as of July 31.
The biggest difference is the tech sector, which makes up much more of the S&P 500. The "Magnificent Seven" stocks alone make up a third of the S&P 500. IWM, on the other hand, is much more diversified. Its top holding is industrial company Moog, at 0.35% of the ETF.
Most people won't know most of the companies in IWM, but it does hold some recognizable ones, such as The Cheesecake Factory (0.17%), Shake Shack (0.9%), Sweetgreen (0.2%), Warby Parker (0.8%), and Cinemark (0.12%).
Image source: Getty Images.
Investors have been seeking more value
With the AI gold rush and surging tech valuations, the S&P 500 is as expensive as it's been since the dot-com bubble. That, along with its high concentration, has led many investors to seek value elsewhere, putting their money into smaller, more reasonably valued companies.
Traditionally, small-cap stocks have their best runs in the earlier parts of economic recovery. However, this is more a case of the group being past due for investor love and a valuation catch-up. It's not just a short-term pop, though. IWM is still a good investment, regardless of immediate market conditions.
It has traditionally underperformed the S&P 500 over the long term, but some exposure to small-cap stocks can help you craft a truly diversified portfolio. I personally try to keep my small-cap exposure below 10% of my portfolio, but that's still enough to capture some of small caps' upside without relying on them too much.
