Prediction: U.S. Small-Cap Stocks Will Beat Large Caps for 10 Years

The same types of stocks don't always keep winning forever. For most of the past 15 years, U.S. large-cap growth stocks (such as major tech companies) have been some of the best places to invest. But that might not be true in the future.

According to Vanguard's latest market forecast, U.S. small-cap stocks will deliver annualized returns of 5.8% to 7.8% for the next 10 years, outperforming U.S. large-cap stocks (which are expected to return 4.8% to 6.8%). Other recent research from Fidelity shows that small-cap stocks have been demonstrating stronger earnings and cheap valuations. That all could add up to stronger performance in the long run.

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If you want to buy small-cap stocks to fit this strategy, which exchange-traded funds (ETFs) should you choose? Let's look at two popular ETFs: the iShares Russell 2000 ETF (NYSEMKT: IWM) and the Vanguard Small-Cap Value ETF (NYSEMKT: VBR). Both small-cap ETFs have outperformed the S&P 500 index and the tech-heavy Nasdaq-100 index year to date.

IWM Total Return Level data by YCharts

Let's take a closer look at these small-cap ETFs and see which could be the best choice for long-term investors in the next 10 years.

iShares Russell 2000 ETF (IWM): 1,974 stocks, 8.7% annualized returns for 26 years

The iShares Russell 2000 ETF (IWM) could be a good choice because it's simple and broadly diversified. It lets you buy "all" the small caps at once. This fund owns 1,974 stocks and intends to track the performance of the Russell 2000 index. During the last 26 years, since the fund's inception in May 2000, it has delivered average annual returns of 8.7%. In the past three years, it's delivered 18%, and in the past year, it's delivered a return of about 41%.

This fund charges an expense ratio of 0.19%, which is a bit higher than most low-cost index funds. But it ranks on the list of best small-cap ETFs and could be worth considering for long-term investors who want exposure to a diversified portfolio of small-cap stocks.

Vanguard Small-Cap Value ETF (VBR): 840 stocks, 26 years of 9.51% annualized returns

The Vanguard Small-Cap Value ETF is a targeted way to invest in value-oriented small-cap stocks. This ETF could also be a good bet based on other Vanguard research projections, which show U.S. value stocks outperforming growth stocks for the next 10 years.

The Vanguard Small-Cap Value ETF holds 840 stocks. That's a lot fewer stocks than the Russell 2000 fund, but still well diversified. This Vanguard ETF has been available since January 2004, and it has delivered average annual returns (by net asset value) of 9.5%.

In the past three years, it's delivered annualized returns of about 16%, and in the past year, it's delivered a return of about 27%.

This Vanguard ETF charges lower fees than the Russell 2000 fund, with an expense ratio of only 0.05%. It currently does not make the list of best value ETFs, but it could be worth considering if you want exposure to small-cap value stocks.

Why buy IWM or VBR

Here's a quick head-to-head breakdown of these two small-cap ETFs:

Data sources: iShares, Vanguard, Yahoo! Finance.

Choosing the best small-cap stocks can be especially complex and risky. Some of these stocks are the up-and-coming large companies of the future, but some are less profitable and more likely to fail. With that in mind, if I had to choose between these small-cap ETFs, I would buy the iShares Russell 2000 ETF (IWM) because it has a more diversified portfolio. Even though it charges a higher fee, this iShares fund could be a better buy for most long-term investors.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cytokinetics, Moog, NRG Energy, and Williams-Sonoma. The Motley Fool recommends Tapestry. The Motley Fool has a disclosure policy.