This ETF's Trouncing the S&P 500 by 10 Percentage Points in 2026, and It Can Keep Outperforming

Despite the modest gains in the S&P 500 (SNPINDEX: ^GSPC) so far this year, a look under the hood will show quite a split between winners and losers. Some of the biggest stocks in the market have underperformed, and some massive sectors (like software) have absolutely tanked. Meanwhile, other areas, like industrials and energy, have substantially outperformed the benchmark index.

But you don't have to invest in a specific sector to outperform the index. One exchange-traded fund (ETF) takes a different approach, focusing on high-quality value stocks based on simple criteria. It's returned 14.1% so far this year as of this writing, absolutely trouncing the S&P 500's 4.2% total return. Importantly, the factors driving it to outperform could make it a great long-term investment right now.

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Focusing on dividend growth to find quality stocks

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) isn't exactly a value stock fund. It tracks the Dow Jones U.S. Dividend 100 Index, which is more focused on dividend growth stocks.

The index includes only companies that have at least 10 years of consecutive dividend payments and high dividend growth over the last five years. The group is further filtered to include only companies with strong free cash flow and healthy balance sheets, ensuring the stocks can continue raising their dividends for years to come. The committee then selects the 100 top stocks based on its criteria. The result is a group of high-quality stocks with large and growing dividends. By their nature, they tend to be value stocks.

The top stocks in the index are:

1. Chevron
2. Texas Instruments
3. UnitedHealth
4. ConocoPhillips
5. Merck
6. Coca-Cola
7. Verizon Communications
8. PepsiCo
9. Home Depot
10. Amgen

As you can see, the stocks span several industries. Energy and consumer staples are the two biggest sectors represented in the portfolio, with healthcare and industrials also making up a significant portion.

Since the Schwab ETF tracks an index, the hard part of stock selection is taken care of. As a result, it's able to charge a minuscule expense ratio of 0.06%. While that's slightly more than the Vanguard Value ETF (NYSEMKT: VTV), paying a few basis points more for the Schwab fund could be worth it. The additional filters for the Dow Jones index ensure a portfolio of high-quality stocks, unlike the simple filters used for index inclusion that the Vanguard ETF follows.

The impact of focusing on quality companies is evident in the relative performances of the Schwab and Vanguard value stock ETFs. As mentioned, the Schwab ETF is up 14.1% so far this year. And while the Vanguard Value ETF is outperforming the S&P 500, its 7.5% total return still falls well short of the Schwab fund.

Why quality value stocks can keep outperforming

The relative outperformance of value stocks in 2026 may be just getting started. There are a few important factors that could favor quality value stocks through the rest of the year and beyond.

Investors have soured on several high-profile artificial intelligence stocks due to concerns about their spending. Indeed, the five major hyperscalers are expected to spend over $700 billion on AI data centers this year. The companies benefiting from all that spend are high-quality value stocks in industrials and energy. The growth in AI spending isn't going to slow down just because market sentiment has shifted.

Additionally, the current administration is very pro-business, providing significant corporate tax rates and more relaxed regulations. Combined with lower interest rates set by the Federal Reserve, that could mean additional capital-market activity, benefiting financial stocks.

Furthermore, the new tax code also resulted in higher tax refunds, which could spur additional consumer spending, benefiting consumer staple businesses.

But even after the strong performance of value stocks over the last few months, their relative valuation still looks attractive. The S&P 500 Pure Growth index trades for an average P/E ratio of 23. The S&P 500 Pure Value index, by comparison, trades for a P/E of just 11.2. The 50% discount represents a historically high level, despite the valuation gap closing since the start of the year.

Investors looking to capitalize on macroeconomic trends should consider the Schwab U.S. Dividend Equity ETF for a low-cost way to invest in high-quality value stocks.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amgen, Chevron, Home Depot, Merck, Texas Instruments, and Vanguard Value ETF. The Motley Fool recommends ConocoPhillips, UnitedHealth Group, and Verizon Communications. The Motley Fool has a disclosure policy.