Russell 2000 ETFs and the Great Rotation
Small cap index ETFs are attracting their biggest flows of the year now.
Investors are looking for growth at a reasonable price and finding it with Russell 2000 ETFs, the funds that provide low-cost exposure to a diversified basket of small-cap stocks.
In the past five trading days, the iShares Russell 2000 Index (IWM) has had its biggest week of the year for flows as investors plowed $3.7 billion into the fund from July 9 through July 15.
These strong flows are in stark contrast to the net outflows of $8.4 from January 1 through the first week of July.
The sharp shift in flows appears to be the beginning of a broader rotation from high-priced large-cap tech stocks to undervalued small-cap stocks with growth potential.
What Is a Russell 2000 Index ETF?
A Russell 2000 index ETF is an exchange-traded fund that seeks to tracks the performance of the Russell 2000 Index, a stock market index that consists of roughly 2,000 of the smallest publicly traded companies in the United States, based on market capitalization.
By investing in a Russell 2000 Index ETF, investors gain access to a broad and diversified portfolio of small-cap stocks across various sectors. This diversification can help reduce the risk associated with investing in individual small-cap stocks.
Small-cap companies often have higher long-term growth potential compared to larger, more established firms. Investing in a Russell 2000 Index ETF allows investors to participate in the potential upside of these growth-oriented companies.
Top 3 Russell 2000 Index ETFs by AUM
| Ticker | Fund | AUM | Expense Ratio | 3-Month Return |
| IWM | iShares Russell 2000 ETF | $66.7B | 0.19% | 11.25% |
| VTWO | Vanguard Russell 2000 ETF | $9.0B | 0.10% | 11.25% |
| FESM | Fidelity Enhanced Small Cap ETF | $760.8M | 0.28% | 10.63% |
Data as of July 15, 2024. Past performance is no guarantee of future results.
iShares Russell 2000 ETF
The iShares Russell 2000 ETF (IWM) is the largest ETF to track the Russell 2000 Index, which consists of more than 2,000 small-capitalization U.S. stocks, offering investors diversified exposure to this potentially high-growth but higher-risk segment of the market in a single investment.
- Assets under management: $66.7 billion
- Expense ratio: 0.19%
- 3-month return: 11.25%
Vanguard Russell 2000 ETF
The Vanguard Russell 2000 ETF (VTWO), popular with do-it-yourself investors, tracks the Russell 2000 Index by targeting the 1001st through the 3000th securities pulled from the Russell 3000 Index.
- Assets under management: $9.0 billion
- Expense ratio: 0.10%
- 3-month return: 11.25%
Fidelity Enhanced Small Cap ETF
The Fidelity Enhanced Small Cap ETF (FESM) is an actively managed ETF that invests primarily in Russell 2000 stocks but applies a quantitative approach to selecting stocks that can potentially outperform the index.
- Assets under management: $760.8 million
- Expense ratio: 0.28%
- 3-month return: 10.63%
Why Invest in Small Cap ETFs in 2024?
Investors have been buying small-cap ETFs recently for a few reasons:
- Anticipation of rate cuts: Recent economic data suggests the Federal Reserve might cut interest rates soon. Small businesses tend to rely more on debt than large companies, so lower interest rates could improve their financial health and boost their stock prices Nasdaq.
- Attractive valuations: Compared to the large-cap growth stocks that drive the S&P 500 Index, small-cap stocks are currently trading at a discount. This means investors might see them as undervalued and ripe for potential growth.
- Growth potential: Small-cap companies, by their nature, have the potential for long-term growth. While they carry more risk, investors might be seeking higher returns, especially if they believe the small-cap sector is poised for an upswing.
- Diversification: Small-cap ETFs offer a way to diversify a portfolio beyond large-cap stocks and potentially improve returns while managing risk through diversification.
The performance of Russell 2000 Index ETFs can be influenced by economic cycles. Small-cap stocks may outperform during periods of economic expansion and may underperform during economic downturns due to their typically higher volatility and sensitivity to economic conditions.
