Most of the attention in the stock market goes to the largest companies: large-cap stocks, some of which are worth more than $1 trillion. The S&P 500 index is a great way to buy the 500 largest U.S. large-caps. For the past 10 years, S&P 500 exchange-traded funds (ETFs) like the Vanguard S&P 500 ETF have delivered annualized returns of about 15.3%.
But what if the big names are about to get outplayed by the little guys? Small-cap stocks, which tend to be younger, riskier, but potentially faster-growing companies, might be ready to take their place in the spotlight. Vanguard’s recent research forecast projects that U.S. small-cap stocks will outperform U.S. large-cap stocks over the next 30 years, perhaps by as much as 2.6% per year.
Image source: Getty Images.
How to buy small-cap stocks: iShares Russell 2000 ETF (IWM)
One of the best ways to buy small-cap stocks is the iShares Russell 2000 ETF (IWM -1.93%). This small-cap ETF holds nearly 2,000 stocks of companies that could become household-name large caps of the future.
IWM hasn’t always beaten the big-company stocks of the S&P 500. Over the past 10 years, IWM has delivered annualized returns of 9.75%, which are lower than the S&P 500’s. Over the past five years, IWM has done even worse: only 6.22% annualized returns.
iShares Trust – iShares Russell 2000 ETF
Today’s Change
(-1.93%) $-5.33
Current Price
$271.37
Key Data Points
AUM
$78B
Dividend Yield
1.01%
Expense Ratio
0.19%
Top Holdings
FROG
0.37%
MOG-A
0.36%
BTSG
0.36%
But over the past three years, small caps have rebounded — IWM has generated annualized returns of about 17.6% during that time frame. If Vanguard’s research forecast is on target, IWM’s strong growth could continue over the next few decades.
How $100 per month in IWM might grow for 20 years
No one knows what the stock market will do in the future. But let’s assume that the iShares Russell 2000 ETF delivers three possible average annual returns for the next 20 years.
- Bear case — pessimistic forecast: Assume 6.22% annualized returns (same as the past five years)
- Base case — middle-ground forecast: Assume 9.75% annualized returns (same as the past 10 years)
- Bull case — optimistic forecast: Assume 17.6% annualized returns (same as the past three years
If you invest $100 in IWM every month and leave that money invested for the next 20 years, here’s how much your investment would grow based on each of these possible rates of return:
|
Year |
IWM — Bear Case (6.22% Annualized Returns) |
IWM — Base Case (9.75% Annualized Returns) |
IWM — Bull Case (17.6% Annualized Returns) |
|---|---|---|---|
|
5 |
$6,794 |
$7,290 |
$8,518 |
|
10 |
$15,981 |
$18,897 |
$27,676 |
|
15 |
$28,404 |
$37,380 |
$70,767 |
|
20 |
$45,201 |
$66,809 |
$167,690 |
Data source: Author’s calculations, Investor.gov Compound Interest Calculator.
Again, none of these returns is guaranteed. IWM might deliver returns that are lower or higher than any of these estimates. But this should give you a good idea of how even a small amount of money, like $100 a month, can grow into serious wealth through long-term investing and compound growth.
Ben Gran 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.