Meet the Unstoppable Vanguard ETF Obliterating the S&P 500 in 2026
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Meet the Unstoppable Vanguard ETF Obliterating the S&P 500 in 2026
010 mins
The U.S. and Iran have been engaged in a geopolitical conflict since the end of February, which has roiled global oil markets and set the stock market on edge. The two countries signed a ceasefire agreement last month, an important first step toward long-term peace, but tensions continue to flare, and the ceasefire unofficially ended this week.
The stock market is still delivering positive returns this year despite periods of volatility, but investors are making a very clear choice about where they park their money. While the benchmark S&P 500 (SNPINDEX: ^GSPC) has climbed by 9% so far, the Russell 2000 is sitting on a much bigger gain of 19%.
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The S&P has exposure to hundreds of multinational companies that draw significant revenue from overseas, whereas the Russell tracks the performance of 2,000 of America’s smallest listed companies, which conduct the majority of their business inside America. This insulates them from some of the geopolitical risks cropping up around the world.
The Vanguard Russell 2000 ETF (NASDAQ: VTWO) is an exchange-traded fund (ETF) that tracks the Russell 2000 by holding the same stocks. Here’s why its run of outperformance versus the S&P 500 could continue.
Small caps are soaring
The companies in the S&P 500 and the Russell 2000 come from 11 different economic sectors, so both indexes are diversified. However, while the technology sector alone accounts for more than one-third of the S&P’s value, the Russell is far more balanced. The three largest sectors (by weight) in the Vanguard Russell 2000 ETF are as follows:
Industrials: 19.8%
Healthcare: 16.1%
Financials: 15.6%
Moreover, the top 10 positions in the VTWO ETF account for just 7.6% of its portfolio, so its performance isn’t beholden to a mere handful of stocks.
Data source: Vanguard. Portfolio weightings are accurate as of May 31, 2026, and are subject to change.
While small-cap stocks attract less attention than their much larger counterparts, they can pack a serious punch. Bloom Energy (NYSE: BE) stock has exploded higher by nearly 800% over the last 12 months, thanks to soaring demand for its clean energy solutions from data center operators that are hunting for alternative sources of electricity for their artificial intelligence (AI) infrastructure.
Credo Technology (NASDAQ: CRDO) has also delivered a blistering 12-month return of 165%, on strong demand for its semiconductor connectivity solutions for AI data centers. Then there is Coeur Mining (NYSE: CDE), which develops gold and silver mines across North America. Its stock is up 70% over the past year.
One thing most of these companies have in common is their primarily domestic operations. Therefore, not only are they somewhat protected from geopolitical issues, but they are also benefiting from a series of favorable government policies. For example, the Trump administration has levied broad-based tariffs on imported goods, which are designed to make domestic American companies more competitive with their foreign counterparts. The administration has also slashed regulations to reduce the cost of doing business.
More upside might be ahead for the Vanguard ETF
An investor who bought the Vanguard Russell 2000 ETF 10 years ago would have earned a respectable return of 152%, but that pales in comparison to the 251% gain in the S&P 500 over the same period.
The Russell has struggled to keep up with the bigger indexes because of its limited exposure to mega-cap stocks like Nvidia and Alphabet, which have often led the market in earnings growth, particularly after the onset of the AI boom. However, that doesn’t mean the Russell can’t outperform the S&P over a single year, and it’s certainly on track to do so in 2026.
Trillion-dollar giants like Nvidia, Alphabet, Amazon, and Meta Platforms generate significant revenue from outside the U.S., which exposes them to the effects of war and other geopolitical issues. Since the U.S. is technically energy independent, domestic companies are less affected by the volatility in the oil markets, sparked by the current conflict in the Middle East.
On Wednesday, July 8, President Trump said last month’s ceasefire with Iran was effectively over, so this conflict is likely to continue for the foreseeable future. As a result, I think the Vanguard Russell 2000 ETF could maintain its recent momentum until the end of 2026, and potentially beyond.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Bloom Energy, Guardant Health, IonQ, Meta Platforms, Nextpower, Nvidia, and Sterling Infrastructure. The Motley Fool has a disclosure policy.
