This ETF Is Officially in a Correction: Here's Why I'm Buying Shares in January

A stock market correction is generally defined as a decline of 10% or more from recent highs. While the Dow Jones Industrial Average and S&P 500 aren't quite there yet, there's one major benchmark index that is: the small-cap Russell 2000.

As of Jan. 12, the Vanguard Russell 2000 ETF (NASDAQ: VTWO) is down by 10.6% from its recent high. But now could be an excellent long-term buying opportunity for patient investors, and there are a few reasons why.

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The Vanguard Russell 2000 ETF in a nutshell

The Russell 2000 is the most widely followed index of small-cap stocks, and the Vanguard Russell 2000 invests in all of the index's components and tracks the performance of the index over time. The median Russell 2000 stock has a $3.5 billion market cap, and while this is a weighted index, no single stock makes up more than 0.6% of the performance.

^RUT data by YCharts

Just to give you an idea of what you're investing in, some of the larger components include Sprouts Farmers Market (NASDAQ: SFM), Rocket Lab USA (NASDAQ: RKLB), Ryman Hospitality Properties (NYSE: RHP), and Abercrombie & Fitch (NYSE: ANF). But if you look at a list of Russell 2000 components, don't be surprised if you've never heard of the majority of the companies on the list. In fact, that's kind of the point.

The Vanguard Russell 2000 ETF has a low 0.10% expense ratio, which means that you'll pay just $1 in annual investment fees for every $1,000 in assets. To be clear, this isn't a fee you have to physically pay. It will simply be reflected in the fund's performance over time.

Why it's down, and why it could rebound

The short explanation of why the Russell 2000 has underperformed the major indexes is interest rates. Over the past two months or so, thanks to recent economic data, expectations for future Federal Reserve interest rate cuts have decreased significantly.

As a group, small-cap stocks are more rate-sensitive than their large-cap counterparts. Smaller companies tend to be more reliant on debt, and higher rates mean higher borrowing costs. Historically, small-cap stocks tend to outperform large caps in falling-rate environments. Smaller companies also tend to be more prone to lower consumer spending during tough economic times.

However, there are some reasons the Russell 2000 could rebound:

• While the rate cuts may slow down in the near term, the most likely direction for interest rates over the next few years is still downward.
• The incoming Trump administration is generally anti-regulation, and that can put smaller players in industries in a better position to compete.
• At the start of 2025, small-cap stocks were trading for their lowest valuation (price-to-book) relative to large-caps since the late 1990s. Last time the gap was this wide, small caps outperformed for more than a decade.

Buy for the long term

In a recent article of stock market predictions for 2025, I wrote that I believe interest rates will still be cut several times this year, despite the lowered expectations. And partially because of that, I've called the Vanguard Russell 2000 ETF my top ETF to buy in 2025.

However, that doesn't mean that I'm buying it because I think it will rise in 2025. Even if it takes longer than I'm expecting for rates to fall, it still looks like an excellent entry point for long-term investors. In fact, small-cap stocks are trading for their lowest price-to-book valuations relative to their large-cap counterparts since the late 1990s, and the last time this happened, small caps went on to outperform the S&P 500 over the next 12 years.

While that doesn't mean the same thing will happen again, the point is that I'm approaching this as a long-term investment at a great entry point, not as an ETF that I'm hoping will soar this year so I can sell it at a profit.

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Matt Frankel has positions in Ryman Hospitality Properties and Vanguard Russell 2000 ETF. The Motley Fool recommends Rocket Lab USA, Ryman Hospitality Properties, and Sprouts Farmers Market. The Motley Fool has a disclosure policy.