New: Introducing the Finviz Crypto Map

Learn More

1 Reason to Buy Vanguard Russell 2000 ETF (VTWO)

By Matt Frankel | August 08, 2025, 7:12 AM

Key Points

  • Small-cap stocks could be major beneficiaries of a falling-rate environment.

  • An index like the Russell 2000 benchmark can be a great way to invest.

  • Small caps trade at a historically low valuation and could be a strong opportunity right now.

There are some good reasons all stock investors should have small-cap exposure in their portfolios. For example, small caps inherently have more growth potential than their large-cap counterparts -- after all, most of the stocks currently in the large cap S&P 500 index started out as small caps.

In addition, small-cap stocks are likely to disproportionately benefit from falling interest rates, which is widely expected to happen over the next couple of years. Small caps tend to be more debt-reliant than larger companies, so this could lower borrowing costs, and as risk-free investment returns fall (like Treasury yields), we could see money come off the sidelines and into more speculative companies.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

However, choosing small-cap stocks to invest in can be an intimidating task. That's why investing in an index fund like the Vanguard Russell 2000 ETF (NASDAQ: VTWO), which tracks the Russell 2000 small-cap benchmark index, could be a smart idea.

Two men pointing at a monitor with financial data.

Image source: Getty Images.

A historically cheap time to buy

There is a massive valuation gap between small caps and large caps. At the start of 2025, small caps were trading at their lowest price-to-book valuations relative to large caps since the late 1990s. And since that time, the gap has widened even further.

As of this writing, the average stock in the Russell 2000 trades for 1.8 times book value. Meanwhile, the average S&P 500 component has a price-to-book multiple of 5.0. To be fair, large caps (led by the megacap tech companies) have grown their earnings more rapidly in recent years, but not by enough to justify such a massive gap.

In full disclosure, I've been accumulating shares of the Vanguard Russell 2000 ETF in my portfolio in recent years. In a nutshell, if we get the much-anticipated falling rate environment, it could create an inflection point that leads to small-cap outperformance.

Should you invest $1,000 in Vanguard Russell 2000 ETF right now?

Before you buy stock in Vanguard Russell 2000 ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard Russell 2000 ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $635,544!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,099,758!*

Now, it’s worth noting Stock Advisor’s total average return is 1,046% — a market-crushing outperformance compared to 181% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of August 4, 2025

Matt Frankel has positions in Vanguard Russell 2000 ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Latest News