Prediction: This Lesser-Known Growth ETF Will Crush the S&P 500 Over the Next 20 Years

Are we in a stock market bubble? That's the biggest question on the minds of many investors. And when people say, "the stock market," they usually mean the S&P 500 index (SNPINDEX: ^GSPC). The S&P 500 is up about 12% year to date. But some investors worry that metrics like the Shiller CAPE ratio are pointing to a bear market ahead.

If you fear that the S&P 500 is overvalued and highly concentrated, if you're worried that the artificial intelligence (AI) boom won't pay off for the mega-cap tech companies that are investing heavily in AI data centers and semiconductors, then you might want to bet on the little guys.

That's right: small-cap stocks might be a better buy than the S&P 500 for the next 20 years. Vanguard's recent market forecast estimates that U.S. small-cap stocks will outperform U.S. large-caps for the next 10 years and the next 30 years. The Vanguard forecast projects an expected average annual return of 5.1% to 7.1% for small-caps for the next 30 years, compared to a range of 4.6% to 6.6% annualized return for large-caps.

If you want to diversify your portfolio away from the AI-heavy large-caps of the S&P 500, buying small-cap stocks with the iShares Russell 2000 Growth ETF (NYSEMKT: IWO) could be a good move. Let's look at this small-cap growth ETF and see if it could be a good investment for the next 20 years.

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iShares Russell 2000 Growth ETF (IWO): 1,127 small-cap stocks focused on growth

The Russell 2000 index is one of the most-recognized ways to buy a broad portfolio of small-cap stocks. The iShares Russell 2000 Growth ETF lets you get more targeted within that broad index. IWO focuses only on growth-oriented companies.

The fund holds 1,127 stocks and is broadly diversified across sectors. The top sector represented is healthcare (making up 29.2% of the fund), with information technology (20%), industrials (15.8%) and financials (9.7%) making up large portions of the portfolio.

The iShares Russell 2000 Growth ETF has delivered average annual returns of about 10.6% for the past 10 years and about 23.2% in the past year.

Why buy IWO...or not

There's no guarantee that stocks of any size or sector will outperform the rest of the market for long. S&P 500 ETFs have delivered average annual returns of about 15% for the past 16 years. That's tough to beat.

But what if the large-caps of the S&P 500 are getting a little overvalued? What if the biggest gains from the future of AI go to a wide range of smaller companies, not just the household name hyperscalers? If so, this S&P 500 winning streak could come to an end, and small-caps might have a resurgence.

If you agree with Vanguard's research estimates and want to invest in smaller, up-and-coming companies that have potential for high growth, the iShares Russell 2000 Growth ETF could be a good choice. There's a decent chance that this broadly diversified fund will beat the S&P 500 for years to come.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.