Growth stock ETFs have led the market higher for much of the past decade.
However, small-cap ETFs could outperform in a lower rate environment.
It’s possible that value stock ETFs could finally see their day in 2026.
With the start of a new year right around the corner, now is a good time to take a closer look at your portfolio and make any needed adjustments. One of the quickest ways to do this is by adding some index exchange-traded funds (ETFs), which, in my view, should make up a meaningful portion of the average investor’s portfolio.
So, what is the top index ETF to invest in for 2026? Let’s look at some top contenders.
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There was a growing call among market prognosticators toward the end of last year that 2025 would be the year for small caps to outperform. While they performed well, they still trailed the performance of large-cap stocks.
However, small caps have outperformed over the past six months, and a growing number of traders have been placing bets on small-cap stocks, according to Bloomberg.
The thinking is that this group could benefit the most from Federal Reserve rate cuts, as lowering borrowing costs often helps smaller companies more and economic stimulus tends to benefit companies that are more tied to domestic demand. Bank of America is predicting that the Fed will cut rates in December, and then twice more in 2026.
For investors looking for good small-cap ETF options, the Vanguard Russell 2000 ETF (NASDAQ: VTWO) is a solid choice. It also comes in growth and value stock options, with the Vanguard Russell 2000 Growth ETF (NASDAQ: VTWG) and the Vanguard Russell 2000 Value ETF (NASDAQ: VTWV).
Growth stocks once again led the market higher in 2025, but this has also led to the talk of an artificial intelligence (AI) bubble. While RBC doesn’t see an AI bubble, it does think 2026 could finally be the year for value to outperform, as investor nervousness leads to a rotation out of some of the market’s biggest growth names.
Lower rates and a reversal of tariffs could also help value stocks, as many are more cyclical in nature, so any economic benefit would be a boost. Many value stocks also carry debt — unlike many top tech companies that carry net cash balances — so lower rates could benefit them by reducing their interest expenses, leading to higher earnings.
If value stocks are finally set to outperform in 2026, the Vanguard 500 Value ETF (NYSEMKT: VOOV) and the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) are two strong options to buy. The former essentially invests in the value side of the S&P 500, while the latter invests in stocks with strong financials that have a history of increasing their dividends.
Image source: Getty Images.
Large-cap growth stocks have been the driving force in the market for more than a decade, and with AI still looking to be in its early innings, this momentum could certainly continue. Today the S&P 500’s top 10 holdings are dominated by growth stocks, mostly tied to AI.
For investors looking to continue to bet on growth stocks, there are several solid index ETF options. The Vanguard Growth ETF (NYSEMKT: VUG) essentially captures the growth side of the S&P 500, while the Vanguard Mega Cap Growth ETF (NYSEMKT: MGK) gives you a more highly concentrated portfolio of just the largest megacap growth stocks, as it mimics the CRSP US Mega Cap Growth Index. The Invesco QQQ ETF (NASDAQ: QQQ), meanwhile, which tracks the Nasdaq-100, has consistently beaten the broader S&P index year in and year out over the past decade.
At this point, I’d stick with what is working, which is large-cap growth stocks. While there is an argument that valuations are frothy, much of that is based on trailing numbers that don’t capture the growth these companies are seeing.
Nvidia, for example, trades at a trailing price-to-earnings (P/E) ratio of 45, but based on 2026 analyst estimates, its forward P/E is just 24. Meanwhile, it has a price/earnings-to-growth (PEG) ratio below 0.7 (with PEG ratios under 1 considered undervalued). Likewise, the stocks of Alphabet, Amazon, Microsoft, and Meta Platforms are all reasonably valued given their long-term growth outlooks.
Given these factors, my favorite index ETF to outperform in 2026 is the Vanguard Mega Cap Growth ETF as it’s one of the most concentrated in these AI market leaders. If these stocks continue to lead, this is the ETF to own in 2026.
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Bank of America is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Alphabet, Amazon, and Invesco QQQ Trust. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Vanguard Index Funds-Vanguard Growth ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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