I've been an active investor for about 15 years, and most of my efforts have been focused on building a portfolio of individual stocks. There's a good reason for this -- it's entirely possible to beat the market by focusing on excellent businesses and holding their shares for as long as they remain excellent businesses. In fact, this is exactly how Warren Buffett (and many other wealthy investors) built their fortunes.
However, as I get a little older, my focus has started to shift toward exchange-traded funds, or ETFs. While I still add individual stocks to my portfolio, I'm also trying to build a more robust "backbone" that should perform well over time with minimal reliance on the performance of any individual company.
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Interest rates could unlock value
Generally speaking, the real estate sector performs better when interest rates are lower, and I foresee the general direction of interest rates (both long- and short-term) heading lower in 2026. So, that's why I'm planning to add shares of the Vanguard Real Estate ETF (VNQ +0.20%) to my portfolio.
NYSEMKT: VNQ
Key Data Points
There are a few reasons why lower rates are a positive catalyst for real estate investment trusts, or REITs:
- Most obviously, lower interest rates make it cheaper for REITs to borrow money to buy properties.
- As rates fall, investors tend to move money out of vehicles like savings and money market accounts and into "riskier," higher-yielding assets, such as REITs.
- Less obviously, but very importantly, commercial properties derive much of their value from the interest rate environment. Without delving into details about concepts like capitalization rates, the short version is that, with all other factors being equal, properties tend to be worth more in a lower-rate environment.
The Vanguard Real Estate ETF is an index fund that provides exposure to real estate investment trusts, and it has a low 0.13% expense ratio. This ETF is a great choice for income investors to hold, regardless of the rate environment, but if interest rates trend downward, it has the potential for market-beating total returns.
2026: The year of small-cap outperformance?
Small-cap stocks have been trading at their lowest valuations relative to large caps since the late 1990s. Of course, with the rise of megacap tech stocks and the surge in artificial intelligence (AI) investment, there are some good reasons for a valuation gap. But it's gone a little too far. The average component of the Russell 2000 small-cap index trades for 2.1 times book value, while the average S&P 500 company trades for more than 5 times book.
The ETF that I invested the most money in during 2025 is the Vanguard Russell 2000 ETF (VTWO +0.76%), and I plan to continue to accumulate shares as we head into 2026.
With a rock-bottom 0.07% expense ratio and broad small-cap exposure, the Vanguard Russell 2000 ETF could be a big winner in 2026 and beyond. In fact, last time the valuation gap between large and small caps was this wide, small caps went on to outperform for more than a decade.
The AI trend should continue in 2026 and beyond
There are trillions of dollars being invested in artificial intelligence infrastructure, and not only that, but the rate of investment is accelerating as we head into 2026. However, I already have exposure to the megacap AI stocks through other index funds, and evaluating individual AI companies isn't my specialty -- so I prefer the ETF route.
One in particular I'm planning to buy in 2026 is the Ark Autonomous Technology and Robotics ETF (ARKQ +1.86%), which is an actively managed ETF run by notable tech investor Cathie Wood.
The reason I find this ETF so appealing is that it offers exposure to a portfolio of stocks that could be big winners of the AI revolution, but it doesn't just focus on the megacaps. You won't find Nvidia or any of the other trillion-dollar tech companies among its top holdings. But you will find companies like Teradyne, Kratos Defense & Security, and Aerovironment.
If you aren't familiar with those, that's kind of the point. The Ark Autonomous Technology and Robotics ETF offers exposure to some excellent businesses that could be major AI winners and aims to produce returns that beat the AI benchmarks.
Great choices for 2026 and beyond
To be clear, I'm planning to buy shares of all three of these ETFs as long-term investments, not just because I think they could outperform the market in 2026. There's no guarantee that interest rates will trend downward in 2026, nor is it possible to know whether there will be general weakness in the economy or any particular sector.
However, over the long term, investors who purchase these three ETFs at their current prices are likely to do quite well. And that's exactly why I'm planning to buy all three this year.
