Vanguard Russell 2000 Index Fund ETF Underperforms S&P 500 ETF in 2025, Likely to Bottom Out in 2025

Vanguard Russell 2000 Index Fund ETF (VTWO) has underperformed the SPDR S&P 500 ETF (SPY) in 2025, gaining ~1% so far. According to previous analysis, VTWO is expected to bottom out in 2025.

The Vanguard Russell 2000 Index Fund ETF (VTWO) has underperformed the SPDR S&P 500 ETF (SPY) so far in 2025, gaining approximately 1% compared to the SPY's performance. This underperformance can be attributed to various factors, including slowing U.S. economic growth and a smaller exposure to international markets, which have buoyed the S&P 500's earnings.

Despite the recent underperformance, VTWO remains a promising investment due to its cyclical tilt, focusing on sectors such as Financials, Industrials, and Consumer Discretionary. These sectors are expected to benefit from the anticipated pick-up in U.S. economic growth in the coming years. Additionally, VTWO's higher earnings yield of 5.5% relative to the SPY's forward earnings yield of 4.15% makes it an attractive option for investors seeking a cyclical bet on the U.S. economy.

The Federal Reserve's (Fed) projections for U.S. GDP growth have been revised downward, with the current expectation being 1.4% for 2025. However, the Fed anticipates a gradual reduction in interest rates in the next few years, which could boost VTWO's earnings yield. The market is pricing in more aggressive rate cuts than the Fed's projections, suggesting a potential change in leadership at the Fed, which could lead to more dovish policies.

Investors should be aware of the risks associated with VTWO, such as a weakening U.S. dollar and the potential for a U.S. recession. The U.S. dollar's weakness could negatively impact VTWO's performance, as the ETF has a smaller exposure to international markets compared to the SPY. Additionally, a recession could have a disproportionately large impact on VTWO's earnings due to its focus on cyclical sectors.

In conclusion, while VTWO has underperformed the SPY so far in 2025, it remains an attractive investment option for those seeking exposure to small-cap U.S. stocks and cyclical sectors. Investors should weigh the potential benefits against the risks and consider their overall investment strategy before making a decision.

References:
[1] https://seekingalpha.com/article/4803047-vtwo-us-economic-growth-likely-to-bottom-out-in-2025
[2] https://www.fool.com/investing/2025/07/20/the-smartest-sp-500-etf-to-buy-with-1000-right-now/