Meet the Spectacular Vanguard Index Fund Crushing the S&P 500 Already in 2026

The S&P 500 (SNPINDEX: ^GSPC) is one of the most widely followed stock market indexes. It hosts a diversified group of 500 of America's largest publicly listed companies, and its top holdings include all of the trillion-dollar giants leading the artificial intelligence (AI) revolution.

Then there is the Russell 2000 index, which is home to approximately 2,000 of the smallest companies listed on U.S. stock exchanges. Many of these companies are benefiting from a series of political and economic tailwinds right now, propelling the index to an 8% return in 2026 already. It's crushing the S&P 500, which has gained just 1.4% so far this year.

The Vanguard Russell 2000 ETF (NASDAQ: VTWO) is an exchange-traded fund (ETF) that tracks the performance of the index by holding the same stocks and maintaining similar weightings. Here's why its early momentum in 2026 could persist for the rest of the year.

Image source: Getty Images.

Simple exposure to small-cap stocks

The companies in the Russell 2000 (and by extension, the Vanguard ETF) come from 11 different sectors of the economy. The healthcare sector has the largest weighting at 18.8%, followed by the industrials sector at 18.1%, and the financial sector at 17.2%. Therefore, the Russell is far more balanced than the S&P 500, for example, where the tech sector alone accounts for 32.9% of the entire value of its portfolio.

Plus, the top 10 holdings in the Vanguard Russell 2000 ETF have a combined weighting of just 5%, so its performance isn't heavily influenced by a small group of stocks. Instead, it relies on broad contributions across its entire portfolio to deliver returns.

Data source: Vanguard. Portfolio weightings are accurate as of Dec. 31, 2025, and are subject to change.

While many of these companies might be small, they can pack a serious punch. Credo Technology stock, for example, has soared by almost 900% since the start of 2023 alone. Demand has surged for the company's data center networking and connectivity solutions, which accelerate the speed with which information moves between chips and devices. This is increasingly important in AI workloads.

Bloom Energy, on the other hand, sells on-site clean energy solutions, which have become increasingly popular with leading data center operators, who are constantly seeking alternative sources of electricity to fuel their AI systems. Then there is IonQ, which is an up-and-coming powerhouse in the quantum computing space. It provides the hardware and software businesses need to adopt quantum technology, which is becoming more capable every day.

Many of the companies in the Russell 2000 conduct most of their business inside America, which means they are less vulnerable to some of the disruptive international trade policies going on at the moment, which include broad-based tariffs on imported goods. In fact, these economic policies are actually designed to protect domestic industries, which might explain why investors have piled into the Russell 2000 to start this year.

The Vanguard ETF could be set for a strong return in 2026

The Russell 2000 typically underperforms larger indexes like the S&P 500 and the Nasdaq-100, mainly because it doesn't have any exposure to trillion-dollar tech giants like Nvidia, Apple, and Microsoft, which have consistently delivered blistering returns over the last decade.

Investors who bought the Vanguard Russell 2000 ETF exactly 10 years ago would be sitting on a respectable return of 220% today, but that pales in comparison to the 346% gain in the S&P 500 and the whopping 602% return in the Nasdaq-100.

Data by YCharts.

However, that doesn't mean the Russell can't outperform in a given year, and the stars seem to be aligning for a strong return in 2026. Besides small-cap domestic companies having some resistance to tariffs as I mentioned earlier, they also tend to benefit significantly from looser monetary policy.

The U.S. Federal Reserve has cut interest rates six times since September 2024, and the CME Group's FedWatch tool predicts two more potential cuts in 2026. According to Goldman Sachs, around 32% of Russell 2000 companies have floating-rate debt, compared to just 6% of the companies in the S&P 500. Therefore, the Fed's cuts are directly boosting the profitability of almost one-third of Russell 2000 companies, and the benefits will compound over time as they reinvest the excess funds into their businesses.

Goldman also argues the Russell is attractively valued, which sets the stage for upside. It trades at a price-to-earnings (P/E) ratio of 20.4 (excluding companies with negative earnings), which is a 19% discount to the 25.2 P/E ratio of the S&P 500.

The combination of all of these factors could ensure that a hot start to 2026 for the Russell 2000 and the Russell 2000 Vanguard ETF carries through to the rest of the year.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bloom Energy, Goldman Sachs Group, Guardant Health, IonQ, Kratos Defense & Security Solutions, Microsoft, Nextpower, and Nvidia. The Motley Fool recommends BridgeBio Pharma and CME Group. The Motley Fool has a disclosure policy.