This Vanguard ETF Owns Stocks Nobody Is Talking About -- and That's Why It's Worth a Look
Key Points
Small-cap stocks have outperformed large caps in 2026 by the widest margin since 2003.
Even after the stcong start to the year, they still trade for a steep discount to the S&P 500.
The Vanguard Small-Cap Value ETF could be a smart addition to a long-term investment portfolio right now.
Over the past few years, mega-cap technology stocks have dominated the headlines, and for good reason. The performance of companies like Nvidia (NASDAQ: NVDA) and Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) has made owning anything other than the Magnificent Seven feel like a mistake.
Small-cap stocks, especially those outside of the technology sector, have underperformed for years. However, the tide seems to be turning. So far in 2026, small-caps are outperforming the S&P 500 by the widest margin in over two decades, and this could be just the beginning of a longer trend.
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One low-cost ETF that investors might want to take a closer look at is the Vanguard Small-Cap Value ETF (NYSEMKT: VBR), which holds 835 smaller companies, most of which have below-average price-to-book and price-to-earnings ratios relative to peers.
The Vanguard Small-Cap Value ETF
The Vanguard Small-Cap Value ETF is an index fund that tracks a diversified index of smaller companies with value characteristics. As mentioned earlier, it owns 835 different stocks with a median market cap of about $10 billion.
On average, stocks held by this index fund have a price-to-earnings ratio of 17.8, compared with 28.1 for the S&P 500 index. As you might expect from a value stock fund, the Vanguard Small-Cap Value ETF is light on technology, but has large concentrations in industrials, financials, and consumer discretionary stocks. To name a few, the fund's larger holdings include NRG Energy (NYSE: NRG), Williams-Sonoma (NYSE: WSM), and Alcoa (NYSE: AA).
Although this is a weighted index fund, no single stock accounts for more than 1.25% of the fund's assets. And like most Vanguard ETFs, the Vanguard Small-Cap Value ETF has a low expense ratio (0.05%). These are the annual investment fees, which will be reflected in the fund's performance over time.
Still a good value
As I said earlier, small-cap stocks have outperformed this year, and the Vanguard Small-Cap Value ETF is up about 13% so far in 2026. But there is still a significant valuation gap between large-cap and small-cap stocks, and there could still be plenty of upside potential ahead.
For one thing, value stocks tend to benefit most from interest rate cuts, as they tend to carry more floating-rate debt than their large-cap counterparts. We're still in a relatively high-rate environment, plus small-cap stocks still trade at a significant discount to their historical average P/E ratios.
To be clear, I'm not saying I expect rates to fall right away or that the valuation gap between small- and large-cap stocks to close right away. But over the next several years, factors like these could lead to continued outperformance.
Matt Frankel, CFP® has positions in Vanguard Small-Cap Value ETF. The Motley Fool has positions in and recommends Alphabet, NRG Energy, Nvidia, and Williams-Sonoma. The Motley Fool has a disclosure policy.