A Modest Reappraisal: VTWO & The Market

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One does occasionally venture a prediction, you know. Last year, with a degree of optimism that now seems… charmingly naïve, I suggested the Vanguard Russell 2000 ETF (VTWO 0.56%) might be rather good for one’s portfolio. The small-cap index, at the time, was looking a little peaked, and one always enjoys backing a potential recovery. A bit like rescuing a perfectly good hat from a rather dreadful milliner.

It delivered a return of 13%— perfectly respectable, of course—but didn’t quite manage to outshine the S&P 500, which, fuelled by this relentless enthusiasm for artificial intelligence, bounded ahead with an 18% gain. One can’t win them all, though frankly, one rarely bothers to keep score. It’s the principle of the thing, don’t you know?

Why the Bullishness, Darling?

The thesis, as it were, rested on two rather obvious points. Firstly, small-cap stocks were trading at a valuation gap compared to their larger cousins that hadn’t been seen in a quarter of a century. The price-to-book ratio of a Russell 2000 component averaged 2.1, while the S&P 500 languished at a rather extravagant 5.0. A clear indication, one thought, that something had to give. It’s all terribly logical, really.

Secondly, falling interest rates generally favour the smaller fry. They tend to rely a bit more on borrowed money, you see, and as the yields on safe investments become less appealing, funds naturally drift towards assets with a bit more… zest. Small-cap stocks, naturally. It’s a rather tiresome cycle, if you ask me, but undeniably effective.

Still a Buyer, Despite Everything

Now, I wasn’t entirely wrong, you understand. A 13% return is hardly a catastrophe, and I did rather explicitly state that I was looking at the long term. One doesn’t dabble in the market for a quick shilling, you know. It’s about building a comfortable little nest egg, and occasionally indulging in a decent vintage.

I remain convinced that the next decade will be kinder to small caps than to the S&P 500. The valuation gap has widened even further, and history, as they say, tends to repeat itself. The last time things looked this skewed—during the dot-com bubble of the 1990s—small caps outperformed for over a decade. One shouldn’t ignore such patterns, even if they are frightfully inconvenient.

And, of course, most experts anticipate further interest rate reductions. Plus, a government generally inclined towards deregulation is always a boon for smaller businesses. It allows them to compete with the behemoths, which is, frankly, rather sporting. So, yes, I continue to accumulate shares of the Vanguard Russell 2000 ETF. It’s a perfectly sensible investment, really. Though one wouldn’t shout it from the rooftops. One never does.

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2026-01-29 19:53