Investors who believe a slowdown in the economy is coming should look at the Vanguard Russell 2000 ETF (VTWO), which tracks the small-cap Russell 2000 index, writes the Motley Fool contributor Chris Neiger. Small caps tend to bounce back faster after tough economic times than larger ones, but investing in the VTWO has its drawbacks: In the words of Neiger, the fund is "mostly missing out" on the AI boom.

Pros of investing in VTWO now

Investing in Russell 2000 funds allows investors to easily diversify their portfolios and capture the long-term growth of the index's constituents, notes Neiger. Investing in the VTWO is one of the best ways to do this, owing to its large size and low expense ratio of just 0.07%. Other Russell 2000 funds have higher fees, as a previous Motley Fool article pointed out

Another argument is that smaller companies tend to bounce back faster after tough economic times than larger ones. That proved true during the COVID recovery, when the Russell 2000 rose faster in response to the federal government's stimulus than the S&P 500 did, Neiger writes. Before that, in the aftermath of the 2008 financial crisis, the Russell 2000 rose 150% between 2009 and 2014 versus a 130% gain for the S&P 500. This is why, Neiger believes, "if you believe the economy is headed for a slowdown soon, having some money in Vanguard's Russell 2000 ETF could be smart." 

U.S. growth will likely bottom out this year, followed by a pickup in 2026-2027, wrote analyst Ivo Kolchev in a blog post on Seeking Alpha. This will play in favor of the VTWO, as most of its companies are from cyclical industries. He advises buying the fund. 

Cons of investing in VTWO now

One of the drawbacks of investing in the VTWO recently is that it has weak exposure to the AI boom, notes Neiger of the Motley Fool, since most of the recent gains in the market have come from large companies, such as Nvidia and Microsoft. 

Another drawback is the fund's higher volatility. Its focus on smaller companies means it will almost always be more volatile than the broader market, Neiger points out. 

Kolchev spotlights another risk: the recent weakening of the dollar. According to Goldman Sachs, 28% of sales of S&P 500 companies come from outside of the U.S., while the figure is only 20% for the Russell 2000. Goldman calculates that S&P 500 stocks that are more internationally oriented have performed 7% better than U.S.-focused S&P 500 players this year.

The AI translation of this story was reviewed by a human editor.

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