Vanguard Russell 2000 ETF: Smart Buy or Market Trap in 2025?

Small-caps are screaming for attention—but is anyone listening?

The Russell 2000's rollercoaster ride continues as Vanguard's ETF mirrors every dip and surge of America's economic backbone. While traditional investors chase blue-chip safety, this fund tracks the real innovators—the companies actually hiring your neighbors.

Performance Paradox

Recent volatility sliced through small-cap valuations like a hot knife. The ETF's composition—heavy on fintech, light on legacy—reflects where growth actually lives. Not in boardrooms, but in garages and co-working spaces.

Timing the Un-timable

Buying now means betting against the Fed's shadow. Interest rate whispers move these stocks more than earnings reports. It's a macroeconomic chess game where retail investors are the pawns.

The Contrarian Case

Forget Wall Street's obsession with quarterly guidance. This ETF thrives on long-term disruption—the kind that makes CFOs sweat and VCs rich. It's capitalism's laboratory, complete with explosive failures and billion-dollar breakthroughs.

Bottom line: If you believe innovation still lives outside the S&P 500 bubble, this fund's your vehicle. Just remember—in small-cap land, 'due diligence' means actually reading SEC filings instead of CNBC headlines.

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(VOO 0.51%). 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.