Investors are re-evaluating their strategies as small-cap stocks, represented by the Russell 2000, have outperformed the S&P 500 over the past year. This shift challenges the long-held belief that large-cap stocks, particularly the tech-heavy S&P 500, are the only viable investment option. With approximately 25% of the Vanguard Total Stock Market ETF (VTI) dedicated to medium- and small-sized companies, it offers a more comprehensive exposure to the U.S. equity market compared to the Vanguard S&P 500 ETF (VOO).
The potential for small-caps is particularly compelling as earnings growth is projected to accelerate significantly in the coming years, with the S&P 600 forecasted to deliver a 29% year-over-year earnings growth by 2026. This growth comes at a forward P/E ratio of 16, approximately 25% lower than that of the Nasdaq-100, making small-caps an attractive value proposition.
For portfolio managers, the current economic landscape suggests that incorporating small-caps can enhance diversification and potentially improve long-term returns, especially as they begin to recover from previous underperformance.
Source: fool.com