On Sept. 18, Jerome Powell, chair of the U.S. Federal Reserve, announced a 50-basis-point (0.5 percentage) cut to the federal funds rate. That aggressive move officially ended an extended period of higher interest rates that began in the wake of the COVID-19 pandemic, ushering in an era of rate easing that may continue for several quarters or longer.
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By virtue of their size, smaller companies are more vulnerable to the higher cost of capital associated with increasing interest rates. Consequently, small-cap stocks have been generally out of favor for the last two years. But things are changing. Lower rates on the horizon have prompted investors to reconsider small-cap stocks. Small caps underperformed their larger counterparts during the rising-interest-rate environment, but they are likely to benefit in a falling-rate regime. That’s why there’s been an increasing focus on the Russell 2000 index and exchange-traded funds, or ETFs, that are based on that benchmark.
The Russell 2000 is a subset of the Russell 3000 Index, which is made up of the 3,000 largest publicly traded U.S. companies. The smaller Russell 2000 includes roughly 2,000 of the smallest stocks in the Russell 3000 based on market capitalization. Since its introduction in 1984, the Russell 2000 has become the premier small-cap index on Wall Street and around the world. This well-known and widely followed benchmark is considered the most comprehensive small-cap indicator in the investment industry.
Retail and institutional investors with a renewed interest in small-cap stocks are looking at the universe of Russell 2000 ETFs for timely opportunities. If you are one of them, this list will be of particular interest. It features seven of the best Russell 2000 ETFs on the market, and each is differentiated from the others by unique characteristics:
| ETF | Expense Ratio | Trailing-12-Month Dividend Yield |
| iShares Russell 2000 ETF (ticker: IWM) | 0.19% | 1.2% |
| Vanguard Russell 2000 Index Fund ETF Shares (VTWO) | 0.10% | 1.3% |
| ProShares Russell 2000 Dividend Growers ETF (SMDV) | 0.40% | 2.7% |
| Invesco Russell 2000 Dynamic Multifactor ETF (OMFS) | 0.39% | 1.5% |
| iShares Russell 2000 Growth ETF (IWO) | 0.24% | 0.6% |
| Vanguard Russell 2000 Value Index Fund ETF Shares (VTWV) | 0.15% | 1.8% |
| Direxion Daily Small Cap Bull 3X Shares (TNA) | 1.08% | 0.94% |
iShares Russell 2000 ETF (IWM)
With a market cap approaching $71 billion, IWM is the largest ETF that tracks the Russell 2000. The fund routinely trades 25 million to 30 million shares or more a day. This means in addition to being the largest Russell 2000 ETF it is also among the most liquid. Size and liquidity can be a big benefit because they contribute to accurate and efficient market prices.
IWM has a very reasonable expense ratio of 0.19%. It’s an excellent choice for an investor looking for a core Russell 2000 fund that offers broad, highly diversified exposure to smaller companies across all 11 sectors.
The fund invests at least 80% of its assets in the underlying index. The remaining 20% may be invested in small-cap securities that generally represent and faithfully replicate the performance of the index.
Russell 2000 ETFs are not known for generating income, but IWM does have a 12-month trailing yield of 1.2%.
Vanguard Russell 2000 Index Fund ETF Shares (VTWO)
VTWO has the same objective and approach of IWM, the previous fund on this list. There are, however, some key differences in the two funds.
First and possibly the most significant is the cost structure. VTWO has an expense ratio of just 0.10%. The savings may seem small but, over time, even small savings can compound into significantly better long-term performance.
Secondly, VTWO is more of a strict replication index fund, meaning that in most instances its portfolio will be virtually identical to the benchmark.
VTWO is a Russell 2000 index ETF that’s appropriate for cost-conscious investors who want a faithful representation of the benchmark. The fund has assets of $11 billion and a 12-month trailing yield of 1.3%.
ProShares Russell 2000 Dividend Growers ETF (SMDV)
SMDV is a $727 million Russell 2000 ETF that’s designed for dividend growth investors.
This unique fund mirrors the Russell 2000 Dividend Growth Index, which is a subset of the Russell 2000 but only includes stocks that have raised their annual dividend for a minimum of 10 consecutive years.
The general idea behind dividend growth investing is that a company becomes more valuable as it grows its dividends and increases its income stream over time. That’s precisely the investment rationale behind SMDV. This fund allows investors to grow their investment income and enjoy the potential for capital appreciation over the long run.
There are about 40 stocks in the Russell 2000 that meet the dividend growth criteria to be included in SMDV.
The ETF has a 12-month trailing yield of 2.7%, significantly higher than the broader index. The fund’s expense ratio comes in at 0.4%.
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Invesco Russell 2000 Dynamic Multifactor ETF (OMFS)
The $278 million ETF OMFS represents an innovative rethinking of the Russell 2000. The fund is based on the Russell 2000 Invesco Dynamic Multifactor Index, which uses sophisticated factor investing strategies to assign weightings to its holdings.
The fund is unique in the realm of small-cap investing. In conjunction with the underlying index, It uses a one-of-a-kind, rules-based system that effectively reweights the Russell 2000 based on how well the component stocks are expected to perform during certain market and economic cycles. The stocks are ranked based on value, momentum, quality, volatility and market cap. Higher-ranked stocks are then more heavily weighted in the portfolio.
OMFS rebalances and is reconstituted based on changes in economic indicators. In volatile economic times that might be as often as monthly. The fund has an expense ratio of 0.39%, and although that’s higher than many index funds’ fees, it’s not out of line for a fund with such a high level of internal trading.
The 12-month trailing yield of OMFS stands at 1.5%.
iShares Russell 2000 Growth ETF (IWO)
Growth stocks are public companies that are expected to grow their revenue, earnings and share price at a faster rate compared to their peers and the market as a whole. The $12 billion ETF IWO invests in growth stocks that are components of the Russell 2000.
The fund is designed to mirror the Russell 2000 Growth Index. The index screens Russell 2000 stocks for growth characteristics like superior price-to-book ratios, high earnings, revenue growth and momentum. From the roughly 2,000 stocks in Russell 2000, about 1,100 growth stocks make it into IWO.
Investors looking for broad exposure to smaller stocks that also qualify as growth stocks can get targeted access in IWO.
The expense ratio for this fund is a reasonable 0.24%. The 12-month trailing yield is 0.6%, which is lower than the parent index provides.
Vanguard Russell 2000 Value Index Fund ETF Shares (VTWV)
VTWV is an intelligent, low-cost choice for Russell 2000 investors who appreciate the potential of value stocks.
As most investors know, value stocks are shares in companies that analysts feel are undervalued based on financial fundamentals and valuation ratios. VTWV mirrors the Russell 2000 Value Index, which screens out the more expensive growth stocks and only includes stocks that represent superior value.
Because the fund has a low expense ratio of just 0.15%, investors can expect VTWV to track the benchmark’s performance quite closely. The fund should be considered a little more aggressive than one that invests in the broad index, but it should be appropriate for moderate investors that have a long time horizon.
The 12-month trailing yield for VTWV is 1.8%. The fund has assets of about $908 million.
Direxion Daily Small Cap Bull 3X Shares (TNA)
TNA is in a category of ETFs known as leveraged funds. This $2.7 billion fund is a much more aggressive option than any other Russell 2000 ETF on this list but, for investors who understand and can afford the risks, it will provide outsized returns.
TNA is managed to provide about three times the daily performance of its benchmark, the Russell 2000. To accomplish this goal the fund managers use complex investment strategies and buy sophisticated derivative securities. TNA uses leverage — that is, invests on margin — and invests in component stocks of the index, index ETFs and investment contracts called swap agreements that, when selected properly, will achieve returns of roughly triple the index.
Because leveraged funds can exaggerate the downside as well as enhance the upside, experts do not recommend them as long-term holdings. They are designed to take advantage of short-term upward moves in the market.
TNA is not a low-cost ETF. The fund has an expense ratio of 1.08%. The 12-month trailing yield for the fund is 0.94%.
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7 Best Russell 2000 ETFs to Buy Now originally appeared on usnews.com
