Meet the Magnificent Vanguard ETF Obliterating the S&P 500 in 2026 Because of Its Unique Momentum-Driven Strategy

Top fund managers like Paul Tudor Jones and Peter Lynch attribute a lot of their success to letting their winning stocks run while unceremoniously cutting their losers. In fact, Lynch often warns investors against pulling up the flowers and watering the weeds -- in other words, don't be so quick to sell high-performing stocks while holding on to laggards in the hope they will turn around.

The Vanguard U.S. Momentum Factor ETF (NYSEMKT: VFMO) is an exchange-traded fund (ETF) that exclusively backs winners. It uses a rules-based, mathematical model to buy stocks with upward momentum, placing greater emphasis on those showing sustained uptrends over the last 12 months of trading.

Past performance isn't always a reliable indicator of future results, but the strategy appears to be working: The ETF has returned 24% in 2026 at recent prices, more than twice the return of the S&P 500 (SNPINDEX: ^GSPC) index. And its recent outperformance isn't a one-off, as it has beaten the market on average every year since its 2018 launch.

Here's why it might be a great buy for investors.

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A diversified portfolio of high-performing stocks

The Vanguard U.S. Momentum Factor ETF selects stocks by assessing their performance over the last 12 months of trading, but it also zooms in further and looks at their trend over the last six months to get a sense of their more recent momentum. Vanguard's mathematical model also makes calculations to ensure a stock is rising on its own merit, not because of strength in the broader market.

Because of its unique strategy, this ETF has a very high turnover rate of 99.9%, meaning it is expected to replace almost every stock in its portfolio over the course of a given year. That highlights how fickle momentum can be, but if there is a stock that rockets higher several years in a row, you can be almost certain it will be in this ETF for the duration.

The ETF held 710 stocks across 11 sectors as of May 31. These five sectors had the highest weightings:

1. Technology: 22.1%
2. Industrials: 20.3%
3. Healthcare: 18.6%
4. Energy: 14.4%
5. Consumer discretionary: 7.9%

Semiconductor giants Micron Technology and Advanced Micro Devices fall under the technology sector. At recent prices, their respective stocks have soared by 764% and 312% over the last 12 months due to incredible demand for chips from the artificial intelligence (AI) industry. Therefore, they are right at home in this momentum-driven ETF.

The industrial sector is also experiencing a surge in AI-related demand. It includes stocks like Caterpillar and GE Vernova, which have both more than doubled over the last 12 months as data center operators scramble for electricity solutions to power their AI infrastructure.

The energy sector has experienced strong returns this year for a separate reason: the geopolitical conflict between the U.S. and Iran, which sent oil prices soaring. The two countries recently signed a preliminary peace agreement and are negotiating a long-term deal, and oil prices have already declined sharply from their April peak. Therefore, many stocks in this sector have started losing momentum, so they could soon be removed from the Vanguard ETF.

The Vanguard ETF can continue to beat the market

The Vanguard U.S. Momentum Factor ETF has delivered a compound annual return of 15.7% since its 2018 inception, beating the S&P 500, which gained an average of 12.7% per year over the same period. That is a sign its momentum-driven strategy is working, and I think it will continue to beat the index over the long term.

The beauty of this ETF is that it won't matter where the best-performing stocks come from. While AI stocks are leading the market higher right now, momentum could shift to robotics, autonomous driving, or quantum computing stocks in the future, and the ETF will be buying them as soon as they catch the attention of its mathematical models. Its strategy effectively eliminates the guesswork.

One drawback to this ETF is its expense ratio of 0.13%, which isn't high on the surface because it means an investment of $10,000 will incur an annual fee of just $13. But it's more than four times higher than many of Vanguard's passive index funds, which have expense ratios as low as 0.03%. Nevertheless, the fund's strong returns have more than offset that higher cost so far.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Caterpillar, GE Aerospace, and Micron Technology. The Motley Fool has a disclosure policy.