Tempted By Those Flashy Growth Stocks? It Might Be Best To Think Small

Tempted By Those Flashy Growth Stocks? It Might Be Best To Think Small
Andrew Rummer

over 2 years ago1 min

Mentioned in story

Since the Covid pandemic began, a gap has opened up in the performance of the largest so-called growth stocks – those with high valuations that reflect their potential to drive future profits – and smaller stocks in the same category.

The chart above shows that the ratio of the Russell 1000 Growth Index, which contains large and highly-valued US stocks, to the Russell 1000 Value Index, which contains large and cheap US stocks, has tended to move in tandem with the ratio of the Russell 2000 Growth Index, containing smallcap growth stocks, to the Russell 2000 Value Index, containing smallcap value stocks. Yet while the former (in blue) has rebounded strongly from the shock of coronavirus, the latter (in pink) is still languishing.

Put another way, the chart below shows how the ratio of the Russell 2000 Growth Index to the Russell 1000 Growth Index is near the lowest point in the past decade.

Chart of Russell 2000 Growth versus Russell 100 Growth

Both charts suggest that growth-focused investors are currently overlooking smaller high-growth companies in favor of the megacap tech titans that dominate the Russell 1000 Growth Index – the likes of Amazon and Microsoft

If this looks to you like an opportunity to load up on some currently unloved parts of the market, there are plenty of exchange traded funds (ETFs) that track the Russell 2000 Growth Index. For example, check out the iShares Russell 2000 Growth ETF (ticker: IWO) or the similar but cheaper Vanguard Small-Cap Growth ETF (ticker: VBK).



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