3 Reasons to Buy This Year's Top-Performing Vanguard ETF (and 2 Reasons to Avoid It).

Investment management firm Vanguard has over 100 exchange-traded funds (ETFs), 65 of which are equity-focused. The best performer in 2026 is the Vanguard Energy ETF (NYSEMKT: VDE), with a 26.8% year-to-date (YTD) return at the time of this writing. The Vanguard Consumer Staples ETF is a distant second with just a 10.2% YTD return.

Here are three reasons why the Vanguard Energy ETF is a great buy, and two reasons to take pause.

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Reasons to buy the Vanguard Energy ETF

1. A low-cost way to invest in U.S. energy stocks

The Vanguard Energy ETF has a mere 0.09% expense ratio, which is less than $1 for every $1,000 invested. This makes it one of the most affordable ways to invest in the U.S. oil and gas industry.

The fund includes integrated oil and gas majors like ExxonMobil and Chevron, and companies in the exploration and production (E&P), storage and transportation, equipment and services, refining and marketing, drilling, and fuels industries.

2. Building a portfolio around quality companies over quantity

This exchange-traded fund is a good buy if you want to bet big on quality even at the expense of diversification. While the fund has 106 holdings, a handful of names are largely responsible for driving its performance.

ConocoPhillips and other E&Ps make up 21.9% of the ETF. So the integrated majors plus the E&Ps are about 60% of the ETF, which makes it sensitive to swings in oil and gas prices. That exposure is paying off big time in 2026, as oil prices surge amid supply disruptions from Iran amid U.S. attacks.

3. Exposure to high-yield value stocks

Even after running up so much in less than three months, the Vanguard Energy ETF still sports a price-to-earnings (P/E) ratio of just 21.9 and yields 2.5% -- which is a better value and higher yield than the Vanguard S&P 500 ETF, which has a P/E of 27.1 and yields 1.1%.

By investing in over 100 energy stocks instead of just one or two, the ETF provides a reliable source of passive income that protects against the risk of an individual company cutting its dividend.

E&Ps in particular are prone to cutting dividends during steep oil and gas downturns. But midstream transportation and storage companies tend to have more reliable dividends due to their fee structures -- which often include fixed fees regardless of whether the customer takes delivery.

Reasons to avoid the Vanguard Energy ETF

1. Concentration risk

ExxonMobil alone makes up 23.5% of the ETF, and Chevron is 15.3%. Normally, extreme concentration in just two stocks would be cause for concern. But ExxonMobil and Chevron have excellent balance sheets, diversified business models, and extensive track records for returning capital to shareholders through buybacks and dividends.

ExxonMobil has increased its payout for 43 consecutive years and yields 2.7%, while Chevron has a 39-year streak and yields 3.8%. Anchoring a portfolio with quality companies is a good way to protect against downside risk, especially in a volatile sector. And ExxonMobil and Chevron can both break even at oil prices far below where oil was before U.S. attacks on Iran.

So while the Vanguard Energy ETF is concentrated for good reason, it's still a characteristic that may not appeal to investors who prefer more diversification.

2. Lack of international exposure

Not only is the Vanguard Energy ETF concentrated on just a handful of stocks, but it also focuses exclusively on U.S. companies. Investors looking for international exposure to the energy sector may prefer the iShares Global Energy ETF (NYSEMKT: IXC). Like the Vanguard Energy ETF, this fund is up big in 2026 with a 25.5% YTD gain.

ExxonMobil and Chevron are the top two holdings, but they make up a combined 28.9% instead of 38.8% in the Vanguard Energy ETF. The iShares Global Energy ETF is more diversified because it includes non-U.S. majors such as Shell, TotalEnergies, BP, Eni, Equinor, Petroleo Brasileiro, and PetroChina. It also holds major Canadian midstream companies, including Enbridge, TC Energy, and Pembina Pipeline.

As research by The Motley Fool shows, only 3 of the 10 largest energy companies by market cap are U.S. companies. Whereas the U.S. dominates the most valuable technology companies by market cap -- especially if you include tech-focused companies like Alphabet and Meta Platforms (in the communications sector) and Amazon and Tesla (in the consumer discretionary sector). In other words, because so many leading energy companies aren't U.S. firms, a U.S.-only energy ETF can feel incomplete compared to other sector ETFs.

With more exposure to dividend-paying oil majors and high-yield international midstream giants, the iShares Global Energy ETF offers a higher yield than the Vanguard Energy ETF at 3% and a lower valuation with a P/E of 18.9. However, it also has a higher expense ratio of 0.4% -- which effectively offsets most of the higher yield advantage over the Vanguard Energy ETF.

Still, this ETF is a better buy for investors looking for more diversification and exposure to international stocks that don't trade on U.S. exchanges.

Daniel Foelber has positions in Equinor Asa. The Motley Fool has positions in and recommends Alphabet, Amazon, Chevron, Enbridge, Meta Platforms, Tesla, and Vanguard S&P 500 ETF. The Motley Fool recommends BP, BlackRock, ConocoPhillips, Equinor Asa, Pembina Pipeline, and Tc Energy. The Motley Fool has a disclosure policy.