The Russell 2000 index is home to approximately 2,000 of the smallest companies listed on U.S. stock exchanges. While the major market indexes like the S&P 500(SNPINDEX: ^GSPC) have soared to new highs recently, the Russell still technically hasn't grown because it hasn't closed above its previous record level from 2021.
But small American companies could benefit from a series of tailwinds this year, including falling interest rates and business-friendly policies from the incoming Trump administration. Since the Russell only needs to climb by another 8.9% to close at a record high, those factors could be enough to trigger a new bull market.
BlackRock is the parent company of iShares, which manages $3.3 trillion in assets spread across more than 1,400 exchange-traded funds (ETFs). One of those funds is the iShares Russell 2000 ETF(NYSEMKT: IWM), which tracks the performance of the Russell 2000. Here's why investors might want to buy it before the index enters a new bull market.
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A simple way to invest in small-cap stocks
Although the S&P 500 is the most diversified of the major U.S. stock market indexes, it's increasingly concentrated because just one of its 11 sectors -- information technology -- accounts for 32.4% of its entire value. That sector is home to heavyweights like Nvidia, Microsoft, and Apple.
The Russell 2000 is a little more balanced. The largest of its 11 sectors is industrials, with a weighting of 18.9%, followed by healthcare at 17.4%, and financials at 17.2%.
In fact, the top 10 holdings in the iShares Russell 2000 ETF account for just 4.06% of its total value. Not a single stock has a weighting of 1% or more, so unlike the S&P 500, it isn't beholden to the performance of just a handful of names:
Stock
iShares ETF Portfolio Weighting
1. FTAI Aviation
0.64%
2. Sprouts Farmers Market
0.53%
3. Insmed
0.42%
4. Credo Technology Group
0.38%
5. Vaxcyte
0.37%
6. Applied Industrial Technologies
0.36%
7. Rocket Lab USA
0.35%
8. SouthState
0.35%
9. Mueller Industries
0.33%
10. Carpenter Technology
0.33%
Data source: iShares. Portfolio weightings are accurate as of Jan. 8, 2025, and are subject to change.
Those companies typically conduct most of their business inside the U.S., and I'll explain why that's important in a moment. Sprouts Farmers Market, for example, operates 410 grocery stores across the country selling organic produce. Insmed develops therapeutics for rare diseases and is headquartered in New Jersey, and then there is SouthState, an American regional bank.
The Russell 2000 could benefit from significant tailwinds in 2025
Gigantic tech companies like Nvidia and Microsoft usually don't need to borrow money because they have billions of dollars in cash on hand. The companies in the Russell 2000, however, often need debt financing to fuel their growth, so they are highly sensitive to changes in interest rates.
In fact, 38% of the debt held by Russell 2000 companies has a floating interest rate, compared with just 6% of the debt held by S&P 500 companies (according to JPMorgan Chase). In other words, smaller companies are more likely to experience significant fluctuations in the size of their repayments every time the Federal Reserve adjusts interest rate policy.
Considering the Fed has actually cut rates three times since September, many small American companies are probably feeling some relief right now. There could be at least two more cuts in 2025, which should therefore be a tailwind for the Russell 2000.
Shifting to politics, President-elect Donald Trump campaigned on a series of business-friendly policies, which will almost certainly benefit the Russell 2000.
Trump wants to impose tariffs on foreign products from key trading partners like China, Mexico, and Canada in an attempt to make American businesses more competitive. He also wants to see significant deregulation across U.S. government agencies, which could reduce compliance costs for domestic companies.
Lastly, under his proposed tax plan, businesses that make products inside the U.S. could have a corporate tax rate of just 15%, compared to 21% for those that don't.
The iShares ETF could outperform this year
During 2017, which was the first year of Trump's previous term in office, the iShares Russell 2000 ETF delivered a return of 13.1%. That was significantly better than its average annual return of 7.9% dating back to when it was established in the year 2000.
One year doesn't make a trend, but Trump will enter the White House on Jan. 20 with a very similar policy agenda to the one in his previous term. Combine that with further interest rate cuts, and I think the iShares Russell 2000 ETF has a great opportunity to outperform again in 2025.
If a gain of 13.1% is in the cards, it will be more than enough to catapult the Russell 2000 into a new bull market this year.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, JPMorgan Chase, Microsoft, and Nvidia. The Motley Fool recommends Rocket Lab USA and Sprouts Farmers Market and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
