Key Points
For years, the S&P 500 has easily delivered the best combination of earnings growth and investor performance.
Later this year, smaller companies are finally expected to deliver better earnings growth rates than large caps.
That could finally help unlock a lot of built-up value in small caps and mid caps.
Up until 2026, the S&P 500 (SNPINDEX: ^GSPC) spent years as the class of the U.S. equity market. Powered by the “Magnificent Seven” stocks and the artificial intelligence (AI) boom, large caps were where investors found the best returns.
But the market may finally be turning. The tech sector is in the red for the year, while value, defensive, dividend, and small-cap stocks are outperforming. Investors are considering whether AI spending has gotten out of control and valuations on pricey megacap growth stocks have gotten a little too high, given conditions.
Will AI create the world’s first trillionaire? Our team just released a report on the one little-known company, called an “Indispensable Monopoly” providing the critical technology Nvidia and Intel both need. Continue »
If your portfolio is still heavy in the S&P 500 or Nasdaq-100, it might be time to look elsewhere for better opportunities. Here are two ETFs that I believe are primed to outperform the S&P 500 over the next several years.
A couple analyzes investment trends on a tablet.
Image source: Getty Images.
1. iShares Core S&P Small-Cap ETF
Over the past few years, small companies have struggled to grow earnings. They were first hit by high inflation and then again by tariffs on imported goods. The S&P 600 Small Cap index experienced 11 straight quarters of negative year-over-year earnings growth from 2022 to early 2025.
That trend is finally beginning to reverse. The index returned to positive earnings growth in the second quarter of 2025. In late 2026, it’s forecast to deliver a higher earnings growth rate than the S&P 500. If that expectation holds, small caps could soon deliver above-average earnings growth at a price-to-earnings (P/E) ratio that’s more than 30% lower than that of the large-cap index.
The iShares Core S&P Small-Cap ETF (NYSEMKT: IJR) tracks the S&P 600 index and is poised to capitalize on this development. And with an expense ratio of just 0.06%, it’s one of the cheapest ways to access it.
2. Vanguard Mid-Cap ETF
If you believe in the small-cap story, the mid-cap story isn’t much different. It could probably be considered a literal middle ground between small and large companies, where earnings growth rates look compelling and P/E ratios fall somewhere in between.
The other big advantage of moving into mid caps here is how much different the index looks than the S&P 500. Industrials is the largest sector holding at roughly 20% of assets. After that, consumer discretionary, financials, and technology are all at around 13% to 15%. That creates a much more diversified portfolio that’s less reliant on just the tech sector or a handful of companies.
The Vanguard Mid-Cap ETF (NYSEMKT: VO) follows the CRSP US Mid Cap Index, a cap-weighted basket of roughly 300 stocks within a specific market cap range. In true Vanguard fashion, its 0.03% expense ratio is among the lowest in this space while remaining highly liquid and tradable.
Should you buy stock in iShares Core S&P Small-Cap ETF right now?
Before you buy stock in iShares Core S&P Small-Cap ETF, consider this:
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Mid-Cap ETF and iShares Core S&P Small-Cap ETF. The Motley Fool has a disclosure policy.
