A lot of people use the new year as an opportunity to review their investment plans. In a lot of cases, investors like to load up on the previous year's winners, giving in to recency bias and being enamored by the idea of continued big returns.
However, as we look at current conditions as we move into 2026, there's a case to be made for moving away from last year's winners. Sure, tech and AI stocks have performed incredibly well over the past three years, but that's a long time for one narrow group to be pulling the market higher. Plus, we're already seeing evidence that the economy is slowing in places, and the labor market is not being supportive.
That's cause for fresh thinking. With that in mind, here are two Vanguard ETFs I think are worth owning in 2026 and one to consider staying away from.
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Own: Vanguard Dividend Appreciation ETF
The Vanguard Dividend Appreciation ETF (VIG +0.11%) is a classic dividend growth play. Its index tracks a basket of companies that have increased their dividends for at least 10 consecutive years. With an expense ratio of just 0.05%, it's one of the most cost-effective ways to add these high-quality companies to your portfolio.
While the fundamental strategy here is sound, the execution of it leaves something to be desired. Instead of weighting the portfolio by any dividend-related metric, it market-cap-weights all qualifying components. That means the largest companies get the largest weightings regardless of dividend history. It's why Broadcom, Microsoft, and Apple are the fund's top three holdings despite none of them paying so much as a 1% yield.
NYSEMKT: VIG
Key Data Points
Why do I like dividend payers in 2026? If we begin to see slower growth or more volatility in the markets, quality tends to matter more. The Dividend Appreciation ETF tends to be filled with these kinds of companies that deliver durable earnings and strong cash flows. Plus, a gradual rate-easing cycle, which is the current consensus expectation, can make dividend stocks look more attractive.
Own: Vanguard Total Bond Market ETF
The Vanguard Total Bond Market ETF (BND -0.24%) is more of a classic risk-off play. It covers virtually the entire U.S. bond market, including corporate bonds, Treasuries, inflation-protected securities, and mortgage-backed bonds. With an expense ratio of 0.03%, it's even cheaper than the Dividend Appreciation ETF.
The bond market has been a very challenging place to invest for most of the past decade. During the Fed's zero-interest-rate policy period, a lot of bonds provided very little income and had little share price appreciation potential since yields were so low. Many people declared the 60/40 portfolio dead and began looking to dividend stocks and other alternatives for any kind of income.
In 2022, when inflation was raging out of control, bonds had one of their worst years ever. They managed to fall at the exact same time that stock prices were falling, providing virtually no diversification benefits despite their long reputation as a risk hedge.
NASDAQ: BND
Key Data Points
Today, yields have normalized, which means investors can capture real income again. With the Fed looking to possibly cut rates further in 2026 and inflation looking stable for the time being, bonds are finally beginning to look attractive again. This would especially be the case if the U.S. economy starts to slow and investors look to take risk off the table.
Avoid: Vanguard Russell 2000 ETF
The Vanguard Russell 2000 ETF (VTWO -0.31%) tracks a broad index of small-cap stocks. The problem is that it's not necessarily a good index of small-cap stocks. Approximately 40% of the index's components are unprofitable. That doesn't fit well at all with the notion that the market could begin rewarding quality if there's a slowdown in growth.
NASDAQ: VTWO
Key Data Points
The attractiveness of small-caps could be heavily dependent on interest rates. These companies tend to be more debt-reliant, and higher rates can become very costly. If rates don't fall as expected in 2026, that could become a real headwind. There is a good value argument to be made for small-caps, but they've shown little ability to make any sustainable progress relative to large-caps.
This could be the year for a small-cap renaissance, but a lot is going to need to go right.
