The Top Vanguard ETF Outpacing the S&P 500 in 2026 (and It's Not The One You Think!)

The S&P 500 (SNPINDEX: ^GSPC) is up around 9% year to date through July 30. That's a solid return for investors, but the multiple market rotations we've seen just in 2026 alone mean better returns have been coming from different areas of the market.

Most investors are focused on tech, artificial intelligence (AI), and semiconductor stocks this year. Those groups are still outperforming the broader market year to date, but the current correction and volatility associated with them may have investors thinking twice right now.

The more consistent outperformers of 2026 are sectors and themes that many investors probably haven't thought about much over the past few years:

• Consumer staples
• Real estate
• Value
• Small-caps

It's the intersection of those last two groups that might be the most interesting. Small-cap value stocks have underperformed the S&P 500 for years. Their valuations have been very attractive, but with earnings growth stagnant or shrinking and many low-quality companies in that group, there hasn't been a real catalyst to send the group significantly higher.

Image source: Getty Images.

With the market rotating now and small-cap earnings growth finally looking like it's going to accelerate, some of the value in the Vanguard Russell 2000 Value ETF (NASDAQ: VTWV) is finally being unlocked. This fund isn't just beating the Vanguard S&P 500 ETF (NYSEMKT: VOO) in 2026. It's crushing it!

VOO Total Return Price data by YCharts

The outlook for small-cap value stocks in 2026 and beyond

Most of the attention in the AI trade has gone to the megacap tech companies. But small-cap companies have also been able to capitalize on the AI boom. Since the 2022 bear market, small caps have struggled to generate meaningful earnings growth (and certainly not to the extent that megacaps did). But that trend is turning around.

In 2026, earnings growth for the S&P 600 Small-Cap index is expected to be 18%. That's expected to grow another 18% in 2027. This last number is perhaps more important because it's the year that small-cap earnings growth is expected to outpace large-cap earnings growth.

The Vanguard Russell 2000 Value ETF trades at about 14 times forward earnings. The Vanguard S&P 500 ETF trades at a multiple of about 22. With earnings growth finally expected to catch up, that valuation gap creates a much more attractive risk/reward opportunity for small-cap value stocks.

As mentioned, there's a bit of a quality concern with the small-cap value category. Roughly 40% of Russell 2000 components are unprofitable right now. In other words, they're cheap for a reason. But I think that value relative to overall earnings growth is positive for this group. That makes the Vanguard Russell 2000 Value ETF look more attractive.

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