Is the Vanguard Russell 2000 ETF a Buy Now?

Key Points

• The Vanguard Russell 2000 ETF recently hit an all-time high.

• The Fed's rate cuts could provide a nice catalyst for this ETF.

• However, an economic decline could derail the Vanguard Russell 2000 ETF's momentum.

• 10 stocks we like better than Vanguard Russell 2000 ETF ›

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The Vanguard Russell 2000 ETF (NASDAQ: VTWO) hit a record high last week. Over the last three months, the exchange-traded fund (ETF) has significantly more momentum than the S&P 500 (SNPINDEX: ^GSPC). Is this Vanguard ETF a buy now?

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About the Vanguard Russell 2000 ETF

Before we attempt to answer that question, let's get to know the Vanguard Russell 2000 ETF. Two important things about this ETF are revealed in its name.

First, it's run by Vanguard. All of Vanguard's funds have low expenses. The Vanguard Russell 2000 ETF is no exception, with its annual expense ratio of 0.07%. The average expense ratio for similar funds is 0.97%.

Second, the Vanguard Russell 2000 ETF attempts to track the performance of the Russell 2000 index. If you're not familiar with this index, it focuses on the 2,000 or so stocks in the broader Russell Index with the lowest market caps. While many of the stocks in the Russell 2000 meet the textbook definition of small-cap stocks (having a market cap of between $300 million and $2 billion), not all of them do.

The Vanguard Russell 2000 ETF currently owns 1,999 stocks. No stock represents greater than 0.64% of the fund's total portfolio. The good news with this is that a huge loss by any given stock won't weigh very heavily on the overall performance of the ETF.

Why buying this Vanguard ETF now makes sense

As mentioned previously, the Vanguard Russell 2000 ETF is sizzling hot right now. Is that a reason to buy the fund? Not on its own. However, the underlying reason for the ETF's strong recent gains could be.

Image source: Getty Images.

Much of the Vanguard Russell 2000 ETF's momentum up until last week is related to widespread anticipation of interest rate cuts by the Federal Reserve. Following the Fed's announcement on Sept. 17, 2025, of a 0.25% rate cut, investors are now eagerly looking forward to further cuts.

Small-cap stocks tend to be more sensitive to interest rates than large-cap stocks. This is mainly because smaller businesses often must borrow more than larger ones. Additional rate cuts, therefore, could especially benefit the stocks in the Vanguard Russell 2000 ETF's portfolio and boost the ETF's price in the process.

Another reason to buy this Vanguard ETF now is valuation. The S&P 500 currently trades at a lofty price-to-earnings (P/E) ratio of 30.85. However, the Vanguard Russell 2000 ETF's P/E multiple is a much lower 18.6.

Last, but not least, history favors small-cap stocks over the long term. Granted, that hasn't been the case over the last five- and 10-year periods. The Vanguard Russell 2000 has delivered a total return of around 143% over the last 10 years compared to a total return of roughly 304% for the large-cap Vanguard S&P 500 ETF (NYSEMKT: VOO). However, returns often revert to their means. If we see this happen, small-cap stocks and the Vanguard Russell 2000 ETF should have a bright future.

A few potential flies in the ointment

Is the Vanguard Russell 2000 ETF a slam dunk for investors right now? Unfortunately, no. There are a few factors that could prevent this ETF from continuing to soar.

Perhaps most importantly, the U.S. economy isn't on the firmest footing. Arguably, the biggest reason the Fed decided to cut rates was the weakening employment picture. The full impact of the Trump administration's tariffs also has yet to be felt. Smaller companies could suffer more than larger ones if the economy stumbles, which would hurt the Vanguard Russell 2000 ETF.

On the other hand, the surging demand for artificial intelligence (AI) has been a key tailwind for large-cap stocks. There are no signs this tailwind is dying down. It's possible, therefore, that large-cap stocks could outperform small-cap stocks over the next few years (just as they have in recent years). In this scenario, investors would be better served by buying other Vanguard ETFs instead of the Vanguard Russell 2000 ETF.

Despite these potential flies in the ointment, though, I view the Vanguard Russell 2000 ETF as a good pick right now.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.