At the beginning of 2024, small-cap stocks were trading for their lowest price-to-book valuation relative to large caps since the late 1990s. And thanks to slower interest rate cuts than many expected, combined with the surge in mega-cap technology stocks, the gap became even wider throughout the year. As we head into 2025, the average small-cap stock trades for two times book value, compared with a median price-to-book multiple of five for the large-cap S&P 500 index.

To be sure, there are some reasons why the S&P 500 should be a little more expensive. The concentration in big tech companies is a big one. But there’s good reason to believe that the gap has become far too wide and a number of catalysts could cause it to narrow in 2025 and for the next several years.

For that reason, the Vanguard S&P Small-Cap 600 ETF (VIOO -0.41%) could be an exceptional investment opportunity right now, from a long-term perspective. Here’s a brief overview of the index, the ETF, and some reasons to be optimistic about it as we head into the new year.

The Vanguard Small-Cap 600 ETF

Although the S&P 500 gets most of the attention, there are actually three main S&P indices that group stocks based on size. The S&P 500 is the largest companies in the U.S., the S&P Mid-Cap 400 focuses on mid-sized companies, and the S&P Small-Cap 600 focuses on smaller businesses. Collectively, the three indices make up the S&P 1500, which is a total stock market index.

As the name suggests, there are 600 companies in the S&P Small-Cap 600. The median market cap of the index components is $3.4 billion – about 1.3% of the size of the median S&P 500 company.

While the Small-Cap 600 is a weighted index, no stock makes up more than 0.66% of the total weight, a sharp contrast to the S&P 500, where the 10 largest stocks make up 35% of the index’s performance. Just to name a few, some of the top holdings you might be familiar with include Bath & Body Works (BBWI -1.49%), Etsy (ETSY -2.76%), Shake Shack (SHAK 0.27%), and Madison Square Garden (MSGS -0.14%).

The Vanguard Small-Cap 600 aims to track the index’s performance, net of fees, over time. And speaking of fees, the index fund’s expense ratio is just 0.10%, which means that you will pay just $1 in annual investment fees for every $1,000 invested. (Note: This isn’t a fee you have to actually pay – it will be reflected in the performance over time.)

Why now?

In addition to the valuation gap mentioned earlier, there are some good reasons to take a closer look at the Vanguard S&P Small-Cap 600 ETF.

For one thing, small cap stocks tend to be a little more debt-reliant on average than their large-cap counterparts, so they could benefit from falling interest rates over the next few years. Plus, by definition, small-cap stocks as a group have higher growth potential and can thrive in strong economies. There’s also the matter of the incoming Trump administration, which has generally pro-business policy stances and could provide a nice tailwind.

Having said all of that, I’m not suggesting a closer look at the Vanguard S&P Small-Cap 600 ETF just because of what it can do in 2025. This is an excellent long-term investment vehicle. Since the fund was formed about 15 years ago, it has delivered a 12% annualized total return for investors. While this doesn’t necessarily mean that you’ll get the same results in the future, the point is that this is a high-potential index fund with a valuation gap that makes it look like a great time for long-term investors to buy.