Are we in a stock market bubble? That's the biggest question on the minds of many investors. And when people say, "the stock market," they usually mean the S&P 500 index (^GSPC +0.58%). The S&P 500 is up about 12% year to date. But some investors worry that metrics like the Shiller CAPE ratio are pointing to a bear market ahead.
If you fear that the S&P 500 is overvalued and highly concentrated, if you're worried that the artificial intelligence (AI) boom won't pay off for the mega-cap tech companies that are investing heavily in AI data centers and semiconductors, then you might want to bet on the little guys.
That's right: small-cap stocks might be a better buy than the S&P 500 for the next 20 years. Vanguard's recent market forecast estimates that U.S. small-cap stocks will outperform U.S. large-caps for the next 10 years and the next 30 years. The Vanguard forecast projects an expected average annual return of 5.1% to 7.1% for small-caps for the next 30 years, compared to a range of 4.6% to 6.6% annualized return for large-caps.
If you want to diversify your portfolio away from the AI-heavy large-caps of the S&P 500, buying small-cap stocks with the iShares Russell 2000 Growth ETF (IWO -0.90%) could be a good move. Let's look at this small-cap growth ETF and see if it could be a good investment for the next 20 years.
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iShares Russell 2000 Growth ETF (IWO): 1,127 small-cap stocks focused on growth
The Russell 2000 index is one of the most-recognized ways to buy a broad portfolio of small-cap stocks. The iShares Russell 2000 Growth ETF lets you get more targeted within that broad index. IWO focuses only on growth-oriented companies.
The fund holds 1,127 stocks and is broadly diversified across sectors. The top sector represented is healthcare (making up 29.2% of the fund), with information technology (20%), industrials (15.8%) and financials (9.7%) making up large portions of the portfolio.
The iShares Russell 2000 Growth ETF has delivered average annual returns of about 10.6% for the past 10 years and about 23.2% in the past year.
NYSEMKT: IWO
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Why buy IWO...or not
There's no guarantee that stocks of any size or sector will outperform the rest of the market for long. S&P 500 ETFs have delivered average annual returns of about 15% for the past 16 years. That's tough to beat.
But what if the large-caps of the S&P 500 are getting a little overvalued? What if the biggest gains from the future of AI go to a wide range of smaller companies, not just the household name hyperscalers? If so, this S&P 500 winning streak could come to an end, and small-caps might have a resurgence.
If you agree with Vanguard's research estimates and want to invest in smaller, up-and-coming companies that have potential for high growth, the iShares Russell 2000 Growth ETF could be a good choice. There's a decent chance that this broadly diversified fund will beat the S&P 500 for years to come.
