The S&P 500 and Nasdaq-100 indices remain below their recent peaks but are no longer in bear market territory. Currently, the S&P 500 is about 10% below its 2025 high, while the Nasdaq is roughly 13% lower.
Some index funds and actively managed ETFs still linger in bear markets, defined as being 20% or more below their highs. Certain investment choices have been identified for their potential value.
### The Small-Cap Slump
At the beginning of 2025, small-cap stocks traded at their lowest price-to-book valuations relative to large-cap stocks in over 25 years. This gap has continued to widen, attributed to the high-interest rate environment favoring larger companies, particularly those in the technology sector.
Large-cap stocks generally trade at a premium, primarily because the largest S&P 500 components are asset-light tech companies. However, the average stock in the Russell 2000 small-cap index has a P/B multiple of 1.8, compared to 4.6 for a typical S&P 500 stock. The Vanguard Russell 2000 ETF (VTWO) is a preferred investment option due to its low expense ratio of 0.07%. It includes all 2,000 small caps in the index and is not top-heavy, with no stock comprising more than 0.65% of the index.
### A Potential Real Estate Inflection Point
The Vanguard Real Estate ETF (VNQ) is 25% below its all-time high as the rising interest rates from 2022-2023 pushed real estate investment trusts (REITs) into a bear market. Elevated interest rates negatively impact REITs for several reasons, including reduced favorability of income-focused investments and increased borrowing costs. Additionally, commercial property values tend to decrease as interest rates rise.
Despite these challenges, REITs have historically performed well in falling-rate environments. With expectations of Federal Reserve rate cuts by year-end, the real estate sector may be nearing an inflection point. The ETF also offers a 4.2% yield, providing a reliable income stream.
### An Actively Managed Tech ETF
The Ark Autonomous Technology & Robotics ETF (ARKQ) is actively managed, differing from typical index funds. Managed by Cathie Wood, this ETF focuses on the AI revolution, presenting a substantial investment opportunity. Unlike many AI index funds, it does not prioritize big tech stocks. While Nvidia is among its holdings, it ranks 18th out of 36. Top holdings include Tesla, Kratos Defense & Security, Teradyne, and Palantir.
With shares about 18% below their 2025 peak and 30% below their all-time high, this ETF may appeal to investors seeking unique AI opportunities without extensive individual research.
These ETFs could be promising for long-term investors, though market volatility may persist, potentially impacting performance in the short term.
