As the S&P 500 prepares to conclude another robust year, marked by a notable 15.6% increase throughout 2015, it reinforces its reputation as a sound long-term investment. This widely recognized market index, which tracks the performance of 500 leading U.S. stocks, is regularly adjusted by fund managers, allowing for the removal of underperformers and the inclusion of emerging winners.
While the S&P 500 remains a solid investment choice, there are exchange-traded funds (ETFs) with higher potential for the coming year. Two standout options are emerging as viable contenders for outperforming the S&P 500 in 2026.
The first is the iShares Russell 2000 ETF, which focuses on small-cap stocks. Historically, the current bull market has favored large-cap stocks, as evidenced by the substantial gains of the “Magnificent Seven,” a group of dominant technology firms driving the S&P 500’s performance. Since the close of 2022, the larger index has nearly doubled the gains of the Russell 2000, illustrating the disparity between the two.
However, the landscape appears poised for change. Typically, as a bull market matures, gains begin to distribute more broadly among various sectors. The ongoing advancements in artificial intelligence (AI) are beginning to benefit smaller companies, providing a possible lift for small-cap stocks. Moreover, the iShares Russell 2000 ETF currently boasts a price-to-earnings ratio of 18.3, significantly lower than the Vanguard S&P 500 ETF’s ratio of 28.7, presenting a compelling argument for investors to shift their focus to smaller stocks as valuation concerns mount.
The second ETF showing significant promise is the VanEck Semiconductor ETF. This fund has emerged as one of the top performers over the past decade, witnessing a staggering 1,180% increase thanks to the semiconductor sector’s expansion. This year alone, the VanEck ETF has surged by 44%, far surpassing the S&P 500’s growth.
Despite its impressive performance, the fund maintains a comparatively reasonable price-to-earnings ratio of 39.7, aligning closely with other technology-focused ETFs. The VanEck Semiconductor ETF is heavily invested in key players driving the AI revolution, such as Nvidia, Taiwan Semiconductor Manufacturing Company (TSMC), and Broadcom. Their strong performance underscores the ETF’s robust outlook, particularly as AI technologies continue to gain traction across various industries. Notably, Nvidia reported a remarkable 62% increase in revenue, while TSMC and Broadcom also showcased significant growth.
Given the deceleration of growth concerns and the continued momentum in the tech sector, especially in AI, the VanEck Semiconductor ETF appears well-positioned for further gains. With industry leaders endorsing the transformative potential of AI, more investors may see this ETF as an attractive option for outperforming traditional index funds in the near future.
Both the iShares Russell 2000 and the VanEck Semiconductor ETFs highlight growing trends in the market, suggesting that while the S&P 500 remains a reliable investment, diversifying into smaller caps and sector-specific ETFs could yield greater returns in the upcoming year.
