Vanguard's Best-Performing ETF Over the Last 5 Years and Could Also Outperform the S&P 500 in 2026

Investment management firm Vanguard offers tons of low-cost exchange-traded funds (ETFs) for equities, bonds, asset blends, and more. How each performs is generally tied to the individual equities they follow.

Given the overwhelming influence of artificial intelligence (AI) on markets these days, you may expect growth and tech-focused ETFs to have been the undisputed standouts over the last five years. But surprisingly, the best-performing fund among Vanguard's 99 ETFs over the last five years is actually the Vanguard Energy ETF (NYSEMKT: VDE).

Let's look at why the Vanguard Energy ETF has been on a tear, and also look into what circumstances would help it outperform the S&P 500 (SNPINDEX: ^GSPC) in 2026.

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Context is key

The Vanguard Energy ETF has averaged a staggering 30.2% annual return over the last five years, which is significantly higher than the second-place Vanguard Financials ETF, which averaged a 20% annual return over that period.

The lights-out performance of the Vanguard Energy ETF is a good reminder of the importance of context when evaluating a stock or ETF's performance in a given window. Five years ago, the world was in the midst of the COVID-19 pandemic, and energy stocks were getting walloped. Oil prices drive margins. And in the fall of 2020, oil prices were at multiyear lows. In fact, they went negative in spring 2020 as demand collapsed and storage capacity was unavailable.

The Vanguard Energy ETF has increased threefold in the last five years. But a lot of those gains came in 2021 and 2022 as the global economy recovered, business operations began to normalize, and travel and transportation increased -- driving oil demand. In fact, over the last three years, the Vanguard Energy ETF is roughly flat, gaining barely over 3% compared to an 80% gain in the S&P 500.

Oil prices could fall further

Oil prices are hovering around multiyear lows as supply outpaces demand.

In its October Short-Term Energy Outlook, the Energy Information Administration forecast that global oil inventories would rise further in 2026, putting pressure on oil prices in the fourth quarter of 2025. The EIA projects Brent crude oil prices (the international benchmark) at just $52 per barrel in 2026. Excluding the $41.96 per barrel average in 2020, that would be the lowest level since $45.13 per barrel in 2016, which came in the aftermath of the 2015 crash. For context, Brent crude oil prices averaged over $100 per barrel in 2022 and over $80 per barrel in 2023 and 2024.

Weak 2026 forecasts are likely factored into investor expectations. Investors got a taste of that last week, as oil prices (and oil stocks) jumped on news that the U.S. and European Union are imposing sanctions on Russian oil companies, which could impact supply and shift buying from Russian customers -- like China and India -- to the U.S.

Still, Brent prices in the low $50s per barrel would strain margins and erode profitability for many oil and gas companies. This reinforces why the Vanguard Energy ETF is one of the simplest and most effective ways to invest in top companies in the sector.

An ETF built around quality

The Vanguard Energy ETF has 111 holdings, but a whopping 37.8% is weighted in ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), and 43.6% if you factor in the most valuable pure-play U.S. exploration and production company -- ConocoPhillips (NYSE: COP).

Building a portfolio around these high-quality oil and gas companies is a great bet. ExxonMobil is investing in low-production regions, such as the Permian Basin, its offshore Guyana assets, and liquefied natural gas to push its portfolio toward $30-per-barrel Brent breakeven levels by 2030. Chevron's breakeven is already estimated at about $30 per barrel -- the lowest in the oil patch. ConocoPhillips has breakeven levels below $40 per barrel.

ExxonMobil has increased its dividend for 42 consecutive years, closely followed by Chevron with a 38-year streak. Meanwhile, ConocoPhillips has scrapped its variable dividend and is focused on consistently growing its ordinary dividend, which it should be able to do with its existing portfolio and a slew of high-margin projects in progress.

At the time of this writing, ExxonMobil yields 3.4%, Chevron yields 4.4%, and ConocoPhillips yields 3.5%. These are significantly higher yields than the S&P 500 average of just 1.2%. In fact, the Vanguard Energy ETF yields 3.1% -- driven by the high yields of its three largest holdings as well as exposure to pipeline, transportation, and refining companies that tend to sport high yields.

High-yield stocks at compelling valuations

With a mere 0.09% expense ratio, or just $9 for every $10,000 invested, the Vanguard Energy ETF provides a low-cost way for investors to gain exposure to top U.S. energy companies. The ETF is a particularly good buy for investors looking to boost their passive income with a portfolio built around industry leaders like ExxonMobil, Chevron, and ConocoPhillips, which have low production costs to support their dividends, even at low oil prices.

For the ETF to outperform the S&P 500 in 2026, there would likely need to be a shift in investor preferences from growth stocks to dividend and value stocks -- like what happened in 2022. Or an unexpected uptick in oil and gas prices related to armed conflicts or extended oil production disruptions. No one knows if those events will happen.

What we do know is the ETF continues to be a good value, with a price-to-earnings ratio of just 16.9 compared to 28.9 for the Vanguard S&P 500 ETF. Investors who are worried about valuations, a sell-off in growth stocks, or are simply seeking ways to boost their passive income may want to take a closer look at the Vanguard Energy ETF.

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.