My Top Vanguard Index ETF Pick for 2026
Key Points
The Vanguard Small-Cap Value ETF tracks an index of smaller companies in sectors like financials and industrials.
The falling-rate environment could help provide a catalyst for this ETF in 2026.
Small caps and value stocks trade at a big valuation discount to their counterparts.
- 10 stocks we like better than Vanguard Small-Cap Value ETF ›
I've been investing for a couple of decades now, and my style has shifted considerably in recent years. I'm still a buyer of individual stocks, but I've started to allocate a greater percentage of my new brokerage deposits to ETFs.
Most of the ETFs I'm invested in are Vanguard products, and for good reason. Vanguard ETFs allow investors to gain exposure to major stock market indices, and for a bare minimum of expense. And to be clear, there are dozens of Vanguard ETFs that are excellent investments from a long-term perspective right now.
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However, as we are getting closer to 2026, there's one that I'm most confident is a great opportunity for long-term investors right now -- the Vanguard Small-Cap Value ETF (NYSEMKT: VBR). Here's what it is, and why I'm planning to buy shares rather aggressively before the end of 2025.
Image source: Getty Images.
About the Vanguard Small-Cap Value ETF
As the name suggests, this ETF tracks an index of small-cap stocks that have value-stock characteristics. In simple terms, think of this as mostly companies that have a $15 billion market cap or less (median is $8.8 billion), and that are businesses of a 'steady compounding' nature as opposed to businesses pursuing explosive growth opportunities. For example, nearly 60% of the ETF is composed of stocks in the financial, industrial, or consumer discretionary sector, while less than 10% is made up of technology or telecommunications stocks.
The fund owns about 840 different stocks, and although it is a weighted index, no individual company makes up more than 0.8% of the portfolio. Just to name a few of the fund's top holdings, it owns NRG Energy (NYSE: NRG), Williams-Sonoma (NYSE: WSM), United Therapeutics (NASDAQ: UTHR), U.S. Foods (NYSE: USFD), and AECOM (NYSE: ACM).
Like other Vanguard ETFs, the Vanguard Small-Cap Value ETF is a very inexpensive way to invest. It has an expense ratio of just 0.07%, which means that for every $10,000 in fund assets, your annual investment expenses will be just $7. (Note: This isn't a fee you have to pay. It will simply be reflected in the fund's performance over time.)
Why is this my top pick for 2026?
One big reason why I'm bullish on the Vanguard Small-Cap Value ETF is because I expect several additional Federal Reserve interest rate cuts throughout 2026, and for longer-term borrowing rates to generally trend downward.
In a nutshell, smaller companies tend to be more reliant on debt than their larger counterparts, and value stocks tend to be more reliant on debt than growth stocks. So, small-cap value stocks are likely to be a big beneficiary of a falling-rate environment.
There are other reasons I think small-cap value stocks will outperform, including valuation. To put it mildly, there's a big valuation gap between larger and smaller companies, and between value stocks and growth stocks. Just look at how these Vanguard ETFs compare:
|
ETF Name (Ticker) |
Average Price-to-Earnings Ratio |
Average Price-to-Book Ratio |
|---|---|---|
|
Vanguard S&P 500 ETF (NYSEMKT: VOO) |
28.9 |
5.2 |
|
Vanguard Growth ETF (NYSEMKT: VUG) |
40.8 |
12.5 |
|
Vanguard Value ETF (NYSEMKT: VTV) |
20.6 |
2.8 |
|
Vanguard Russell 2000 ETF (NASDAQ: VTWO) |
18.3 |
2.0 |
|
Vanguard Small-Cap Value ETF (NYSEMKT: VBR) |
17.6 |
1.9 |
Data source: Vanguard. As of Sept. 30, 2025.
To be fair, some of the valuation gap makes sense, especially when it comes to the price-to-book value discrepancy. For example, growth stocks tend to not need a lot of physical assets to generate revenue, so their book value tends to be relatively low. But the fact is that smaller companies (the Russell 2000 is a small-cap index) and value stocks trade rather cheaply right now. And the Vanguard Small-Cap Value ETF combines both.
In a nutshell, when you hear "the stock market is expensive," it isn't referring to small caps and value stocks. There are still some attractive opportunities in the market, and this is one ETF that I think could have a strong 2026.
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Matt Frankel has positions in Vanguard Russell 2000 ETF, Vanguard S&P 500 ETF, and Vanguard Small-Cap Value ETF. The Motley Fool has positions in and recommends Aecom, United Therapeutics, Vanguard Index Funds-Vanguard Growth ETF, Vanguard Index Funds-Vanguard Value ETF, Vanguard S&P 500 ETF, and Williams-Sonoma. The Motley Fool has a disclosure policy.
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