This Vanguard ETF Is Crushing the S&P 500 This Year

Small caps have been outperforming large caps in 2026, with tech and growth leading the charge. Despite a turnaround in May, small caps still present a compelling investment case. The Vanguard Russell 2000 ETF has returned 16% year to date, far surpassing the 10% return of the Vanguard S&P 500 ETF.

The volatility in stocks this year and significant leadership rotations over the past six months indicate an evolving economic environment. For the Vanguard Russell 2000 ETF to continue leading, its operating environment must continue to improve.

Small caps have trailed large caps for several years due to corporate earnings. Large caps have delivered solid earnings growth since 2023, benefiting from the Magnificent Seven boom. Small caps, on the other hand, have struggled to generate sustainable earnings growth, impacted by tariffs, inflation, and interest rates.

However, the tide is turning. Small-cap earnings growth is expected to hit double digits in 2026, catching up to large-cap growth rates. If this trend continues, the valuation gap between the two groups favors small caps, with the Vanguard Russell 2000 ETF trading at a lower forward P/E ratio compared to the Vanguard S&P 500 ETF.

Small caps require different catalysts than the S&P 500, given their composition and sector exposure. Small caps are more cyclically sensitive and perform better in accelerating growth environments. Profitability is also crucial, as a significant portion of Russell 2000 components are unprofitable, making them vulnerable during an economic slowdown.

The positive momentum for small caps and the Vanguard Russell 2000 ETF shows no signs of slowing down. If these companies can meet or exceed their earnings growth estimates, they have the potential to outperform the S&P 500 for an extended period.

Before investing in the Vanguard Russell 2000 ETF, consider the recommendations of the Motley Fool Stock Advisor analyst team. They have identified the 10 best stocks for investors to buy now, with the potential for significant returns in the coming years. Past recommendations, such as Netflix and Nvidia, have delivered impressive returns, outperforming the market.

In conclusion, small caps are finally having their moment in 2026, with the Vanguard Russell 2000 ETF leading the charge. As the economic environment continues to evolve, small caps present an attractive investment opportunity for investors seeking growth and potential outperformance.