Wall Street doesn’t always get it right, so investors shouldn’t base their decisions solely on the predictions of any analyst. But Tom Lee of Fundstrat Global Advisors is on the right track, with a series of very accurate calls in recent years.
He predicted the S&P500(SNPINDEX: ^GSPC) would rise to 4,750 in 2023, while many other analysts had negative expectations, ending the year at 4,769. Additionally, three of its 2024 S&P 500 targets have already been surpassed (5,200, 5,500, and 5,700), and the index is now less than 2% away from hitting its most recent target of 6,000.
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Lee also entered 2024 with a bullish target for the Russell 2000 index, which includes approximately 2,000 of the smallest companies listed on U.S. stock exchanges. He believed falling interest rates and cheap valuations of small-cap stocks would drive the index to a 50% gain by 2024.
His prediction could get another boost thanks to President-elect Trump’s election victory. The Russell 2000 rose 5.8% on November 6 (the day after the election), surpassing the S&P 500’s 2.5% gain.
The Russell is up 18.9% so far since November 6, so it will need to rise another 27.1% over the next two months to meet Lee’s target. It power be a bridge too far, but the Vanguard Russell 2000 ETF(NASDAQ: VTWO) directly tracks the performance of the small-cap index, so it’s an easy way for investors to profit if Lee turns out to be right.
Image source: Getty Images.
There are eleven different sectors of the US economy represented in both the S&P 500 and the Russell 2000. However, the technology sector accounts for almost a third of the S&P 500, so just a handful of stocks can strongly influence the performance of the entire sector. index.
The Russell 2000 is much more balanced. The industrial sector is the largest with a weighting of 18.9%, followed by the healthcare sector with 17.4% and the financial sector with 17.2%.
Furthermore, the top 10 holdings in the Vanguard Russell 2000 ETF represent only 3.64% of the total value of the entire portfolio.
Data source: Vanguard. Portfolio weights are accurate as of September 30, 2024 and are subject to change. Table by author.
Vaxcyte stock is up 65% this year (at time of writing) and now has a market cap of $13.8 billion, which is a good reference point for the size of the other companies in the Russell 2000. Vaxcyte is a biopharmaceutical company that makes specialized vaccines to fight bacterial infections.
FTAI Aviation supplies aftermarket engine parts for aircraft and provides maintenance services to airlines. Sprouts Farmers Market, on the other hand, is an organic supermarket chain with more than 410 stores across America. Simply put, there is an incredible amount of diversity, even among the top five Vanguard ETF holdings.
Outside of the top 10, the ETF owns other popular small-cap stocks, such as apparel retailers Abercrombie and Fitchsemiconductor service company Axcelis Technologiesand a cybersecurity powerhouse Shelf life.
The US Federal Reserve cut the Federal Funds Rate (overnight interest rate) by 50 basis points at its meeting in September. It was the first rate cut since March 2020, and the Fed indicated that more cuts could happen this year, next year and perhaps even in 2026.
Tech giants love Nvidia, MicrosoftAnd Apple generally do not require debt financing. In fact, they return tens of billions of dollars to shareholders every year through dividend payments and stock buyback programs because they are sitting on so much cash.
Smaller companies, on the other hand, often rely on debt to fuel their growth JPMorgan Chase38% of Russell 2000 voters own variable rate debt (compared to 7% for the S&P 500). That makes them very sensitive to changes in the Fed’s policy rate. Falling interest rates can increase their borrowing capacity and reduce their interest costs, which is a direct tailwind to their revenues.
Furthermore, former President Trump just won re-election to the White House. We know he spent his first term (from 2016 to 2020) reducing regulation and cutting corporate taxes, which is generally good for businesses. Anything that makes it easier for small businesses to operate, or gives them additional financial resources, will be a huge boost to the Russell 2000.
Appreciation could also pave the way for upside potential for the Russell, according to Tom Lee. The index trades at a price-to-earnings ratio of 18.3, which is much cheaper than the S&P 500’s price-to-earnings ratio of 29.3. But there’s a caveat: Investors pay a premium for the S&P 500 because of its high-quality components such as Nvidia, Microsoft and Apple, which have been successful for decades.
As a result, there’s no guarantee that the Russell will ever fully close the price-to-earnings gap with the S&P 500, but the tailwinds I highlighted will certainly help.
The Russell 2000 does have that never generated a 50% profit in one year (dating back to 1988). Plus, as mentioned, it would need to return 27.1% over the next two months to get there. Considering that interest rates only rose by 18.9% in the first ten months of 2024, this does not seem to be a realistic result.
The Vanguard Russell 2000 ETF has delivered a compound annual return of 10.3% since its inception in 2010, despite the federal funds rate being below 1% for most of that period. So a 50% gain would be completely unusual, even in an environment of interest rate cuts.
The Russell could deliver further gains through the remainder of 2024 thanks to the tailwinds I highlighted, so investors who already have exposure to the S&P 500 could benefit from adding the Vanguard ETF to their portfolio.
Investors without exposure to the S&P 500 may want to put their money to work there. The Vanguard S&P 500 ETF(NYSEMKT: VOO) has delivered a compound annual return of 14.5% since 2010, consistently outperforming the Vanguard Russell ETF by a wide margin. The 4.2% difference per year makes a big difference in dollar terms thanks to the magic of compounding:
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JPMorgan Chase is an advertising partner of Motley Fool Money. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool has positions in and recommends Apple, JPMorgan Chase, Microsoft, Nvidia and Vanguard S&P 500 ETF. The Motley Fool recommends Sprouts Farmers Market and UFP Industries and recommends the following options: long calls at $395 in January 2026 at Microsoft and short calls in January 2026 at $405 at Microsoft. The Motley Fool has a disclosure policy.
1 Vanguard ETF That Could Surge 27.1% Before the End of 2024, According to a Top Wall Street Analyst was originally published by The Motley Fool
