Exchange-traded funds (ETFs) are a great way for retail investors to invest in the stock market if they don't feel comfortable or have time to pick individual companies. That's because you can purchase an ETF like a stock, but they hold a basket of stocks or financial instruments, providing more diversity and less risk. You can also find ETFs that track any sector, foreign market, or one of the countless indexes in the market.
Here's one no-brainer small-cap ETF investors can buy for less than $100 right now.
Is it time to rotate?
Trading around $91, the Vanguard Russell 2000 ETF (VTWO -1.48%) closely tracks the Russell 2000. The Russell 2000 tracks 2,000 small-cap companies with a market capitalization between $250 million and $2 billion. The Russell 2000 includes small-cap stocks in a variety of different industries. Industrials hold the largest percentage of the Russell, followed by healthcare, financials, and tech.
The Russell is also considered a gauge of the U.S. economy, given its focus on thousands of small companies. Larger companies, including large tech and growth names, have dominated the bull market over the last two years, while the Russell has trailed considerably.
But now could be the time for rotation. Some experts think the bull market will broaden into other sectors that haven't performed as well and more affordable small-cap stocks. However, there are also concerns about the economy. Many expect all the Federal Reserve's interest rate hikes to tip the economy into a recession.
Right now, however, the economy looks to be on solid footing. Unemployment has declined over the last two months, while the Consumer Price Index has risen each of the past three months. Retail sales in September also just beat expectations.
But once unemployment starts rising, it usually keeps moving in that direction because unemployment is a lagging indicator. The Fed is also trying to engineer a soft landing and has begun cutting interest rates. The goal is to bring down inflation without seeing a huge surge in unemployment.
Small-caps could be tricky because lower interest rates help them by lowering the cost of floating-rate debt and boosting profits. Lower interest rates also make riskier assets more appealing. But if the Fed cuts rates significantly, it's likely due to a deteriorating macro backdrop, in which small-cap stocks may not fare so well.
Regardless, small-cap stocks have historically outperformed large-cap stocks in the six months following a half-point cut, according to Jill Carey Hall, head of U.S. small and mid-cap strategy at Bank of America.
Why the Vanguard Russell 2000 ETF is a no-brainer
While I can't predict what will happen to the economy, I think investors should have some exposure to small-cap stocks in their portfolios because there is significant upside in a soft-landing scenario. They could also benefit if rates come down and there is not a severe recession. Vanguard's Russell 2000 Index also has a low 0.10% expense ratio, the fees you pay annually to own a fund expressed as a percentage of your investment.
Small caps have certainly risen in the bull market, but not nearly as much as large caps. The Russell is up only about 13% compared to the broader S&P 500's gain of 23%. If the rally continues, which it very well could, it should broaden out and lead to more buying of small caps that trade at cheaper valuations than large-cap stocks.
