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The Best Vanguard Small-cap Etfs To Invest $500 In Right Now
When looking at stock market indexes, the S&P 500 (SNPINDEX: ^GSPC) gets the most attention from investors. It follows that exchange-traded funds (ETFs) tracking the index get the most money inflows. There is a good reason for this. The S&P 500 tracks a select group of large U.S. companies that meet certain criteria and is considered one of the best representations of the stock market as a whole.
The S&P 500 also has a strong track record. The index is on its way to its second-straight year of 20% or more returns, and over the past decade, it has an average annual return of 13.4%, as of the end of November.
However, the S&P 500 has become a bit top-heavy, with Apple, Nvidia, and Microsoft now making up about 20% of the index. How these three stocks perform is going to have a big influence on the S&P's performance in the years ahead.
Given that, there is a case to be made that adding small-cap exposure to your investment portfolio might be a good idea. Let's look at some reasons why this might be a good time to buy some small-cap ETFs.
One reason to begin to look at small-cap ETFs right now is that historically small-cap stocks outperform large-cap stocks during a declining interest rate environment. The Fed has already begun cutting rates this year, and its rate-cutting cycle is widely expected to continue over the next two years. Smaller companies tend to be more sensitive to interest rates, as borrowing costs tend to have a more impactful effect on their businesses.
In addition, the new Trump administration and its "America First" policies could be a boost to small-cap stocks, which tend to be more U.S.-focused with less international exposure. The incoming administration has talked about lower taxes, economic stimulus, and fewer regulations, all of which have the potential to be a boost to smaller companies. The talk of increased tariffs, meanwhile, is more industry-specific and could help or hurt different smaller companies.
Let's look at three small-cap index Vanguard ETFs that investors should consider. When given the option, I prefer Vanguard ETFs due to their very low expense ratios.
1. The Vanguard Russell 2000 ETF
The Vanguard Russell 2000 ETF (NASDAQ: VTWO) is a great option for investors looking for broad-based, small-cap exposure. The ETF tracks the Russell 2000 index, which makes up the 2,000 smallest companies in the Russell 3000 index, which includes the 3000 largest companies traded in the U.S.
The median market cap of its constituents is $3.1 billion. There is no heavy concentration, with its largest holding representing only about 0.5% of its portfolio.
The ETF is also very diversified when it comes to sectors, with industrials making up over 18% of the index followed by financials and healthcare, which are both over 17%.
The Vanguard Russell 2000 ETF has been a stronger performer this year, up 20.7% as of the end of November. The fund has an average annual return of 9.1% over the past decade.
Data by YCharts.
2. Vanguard Small-Cap Growth ETF
For investors looking for a small-cap ETF more oriented toward growth stocks, the Vanguard Small-Cap Growth ETF (NYSEMKT: VBK) is a good place to start. The ETF tracks the CRSP US Small Cap Growth Index, which tracks growth stocks that make up between the top 85% to 98% of investable equity-market capitalization.
Given that focus, the median market cap of its constituents is higher than that of the Vanguard Russell 2000 ETF coming in at $8.3 billion. The ETF's largest holding accounts for just over 1% of its portfolio, and there are some more widely recognizable names among its top holding, including UGG and Hoka maker Decker Outdoors, red-hot adtech company AppLovin, and stock-trading platform Robinhood Markets.
Technology is the ETF's largest sector, representing more than 21% of its portfolio, with industrials, healthcare, and consumer discretionary all having more than 15% weightings.
The Vanguard Small-Cap Growth ETF has outperformed the Russell 2000 ETF this year, up 24.8% as of the end of November. The fund has an average annual return of 10% over the past 10 years.
3. The Vanguard Russell 2000 Growth ETF
If you're looking for a small-cap growth ETF but with companies that have a lower median market cap than the Vanguard Small-Cap Growth ETF, the Vanguard Russell 2000 Growth ETF (NASDAQ: VTWG) is just the ticket. The ETF, as the name implies, tracks just the growth side of the Russell 2000 index and consists of about 1,135 stocks.
The median market cap of its holdings is much lower than that of the Vanguard Small-Cap Growth ETF at $3.6 billion. Its largest holding is about a 1% position. Healthcare and industrial stocks make up half the ETF's portfolio. Technology stocks, meanwhile, represent over 17% of its holdings.
The ETF has been the best performer of the three through the end of November, up 25.2%. It has an average annual return of 9.4% over the past 10 years.
All three ETFs are solid options to get some nice small-cap exposure in an environment that currently is shaping up to be beneficial for the group.
Should you invest $1,000 in Vanguard Russell 2000 ETF right now?
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AppLovin, Apple, Microsoft, Nvidia, and Vanguard Index Funds - Vanguard Small-Cap Growth ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
