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Russell 2000 Growth Stocks May Outperform the S&P 500
In the Growth sector of the Russell 2000, there is a significant composition of information technology-related stocks. This sector has benefited from favorable technical momentum throughout 2023 despite the historical momentum, maintaining satisfactory fundamental values. This follows current consensus indications, which could be confirmed by the upcoming fourth quarter earnings season. The same cannot be said for the other companies in the Russell 2000 index, and an excellent historical recap of what happened in 2023 can be found here.
Making a comparison of the RUSSELL-related ETF multiples, such as the Growth (NASDAQ:VTWG) component of the RUSSELL 2000 index, with those of the S&P500 and RUSSELL 2000 itself shows some convenience, both technical and fundamental, in holding the VTWG ETF. For a long-range trade, I therefore remain bullish about the performance of the VTWG ETF.
Rising Financing Costs for Small Caps, Yet IT Sector Remains Robust
The table below presents some key data of the top five capitalizations of the Vanguard Russell 2000 Growth ETF.
The 5 largest capitalizations of the VTWG ETF. (Excel)
The component of technology stocks in the Russell 2000 Growth index is 28.84%, a significantly high percentage compared to the one found in the Vanguard Russell 2000 Value ETF (VTWV), where the financial sector stocks segment represents a significantly larger capitalization instead. Also, in the Vanguard Russell 2000 Index Fund ETF (VTWO), technology accounts for 16.50 %, a significantly smaller impact than in Growth.
Sectors that make up the VTWG ETF (Seeking Alpha)
Vanguard Russell 2000 Growth ETF (VTWG) More Affordable Than Ever
In times of economic uncertainty, such as those experienced in recent years and currently being faced, investors tend to favor large-cap stocks. This trend does not require substantiation through the myriad of reports offered by investment banks, but can be easily observed from the technical performance of the market.
The year 2024 appears to be opening doors to a significant investment opportunity, in my opinion. This is because a quick comparison of the market multiples of certain American indices easily highlights the cost-effectiveness of the VTWG.
Let us start by analyzing only the RUSSELL 2000
In general, the P/E ratio of Vanguard Russell 2000 Index Fund ETF stands at 14.7. However, from the analysis of this report by FTSE RUSSELL, the average historical P/E over the past 40 years of the index is around the level of 25. If, however, we narrow the scope of analysis, and consider the average of the past 20 years, we would find even higher figures.
Comparison of P/E of RUSSELL indexes with highlighting of time-weighted Percent of Index (FTSE Russell)
Comparison between the multiples of the VONE ETF and the VTWG
The Vanguard Russell 1000 ETF (VONE) has a P/E ratio of 23. VTWG, has a P/E ratio of 22.4. Given its higher risk profile, this evidence represents an important discordance from the past.
Comparison between the historical price of the VONE ETF and the VTWG
The Russell 2000 Growth has historically outperformed the Russell 1000. Over the past decade, the risk premium has benefited investors in an expansive monetary policy environment.
On the other hand, the traditional Russell 2000 has underperformed the Russell 1000.
Therefore, even from a technical point of view, it makes more sense to ride a small-cap rally with the VTWG ETF rather than the VTWO.
Outlook for Growth in the Fundamentals of Companies in the Russell 2000
This content can be extremely useful in order to get a clearer picture of the financial performance of these companies through the third quarter of 2023. For 2024, according to consensus estimates, earnings growth of Russell 2000 companies is expected to rebound to 28.2 percent. For 2023, on the other hand, a decline of 11.2 percent is expected, as indicated by the FTSE Russell report. A detailed analysis by the WSJ offers important insights in this regard.
According to estimates in the FTSE RUSSELL report regarding Q4 2023, the four sectors with the best average earnings in the Russell 2000 compared to last year are real estate, healthcare, utilities, and technology. These have shown good financial resilience despite rising financing costs, with a positive impact on future prospects.
12M Industry Total Returns (%) (FTSE Russell & Lseg)
Negative Catalysts: What Could Invalidate My Investment Thesis?
The recovery of the RUSSELL 2000 may come later than expected.
Even if the Fed concludes its rate hikes and begins its first cuts, there could be significant delays in the process of recovering fundamental values due to the time required to renegotiate floating rate debt, typically on a quarterly basis.
I would also like to add that not everyone finds these types of ETFs offered by Vanguard to be extremely representative of the market segment they are supposed to represent. An interesting comparison is presented here.
I Remain Faithful to the Data and Bullish on VTWG
Vanguard Russell 2000 Growth ETF has attractive multiples relative to its history. It has a lower P/E than the RUSSELL 1000. It has historically outperformed other US stock market indexes in terms of percentage performance.
In my opinion, the reason is to be found in the strong growth expectations of the IT segment, which represents a significant component in the composition of the reference benchmark of the VTWG ETF.
Going beyond the speculations linked to the first reductions in the Fed’s rate level and looking at the estimates for the fourth quarter of 2023, and extending them to 2024, the VTWG ETF becomes an interesting alternative to follow the trend of the growing American market according to my opinion.
