Key insights
- The article suggests VTI (Total Stock Market ETF) may outperform VOO (S&P 500 ETF) due to anticipated earnings growth in small-cap stocks. VTI's broader exposure to small and mid-cap companies, currently trading at lower P/E ratios, positions it favorably as small-cap earnings are projected to outpace large-cap earnings in 2026. This implies a potential shift in market leadership beyond the mega-cap tech stocks dominating the S&P 500.
The Vanguard S&P 500 ETF (VOO 0.12%) and the Vanguard Total Stock Market ETF (VTI 0.10%) are two of the most well-known and widely invested funds in the world. With combined assets of more than $1.6 trillion, they serve as the cornerstone of countless portfolios.
But the two exchange-traded funds (ETFs) are not the same. Both offer market-cap weighted baskets of U.S. stocks, making them look and act very similar. But the latter's inclusion of mid- and small-cap stocks could be the differentiator that makes it the better opportunity at the moment.
The Vanguard S&P 500 ETF tracks the S&P 500, a basket of 500 of the largest U.S. stocks. The Vanguard Total Stock Market ETF follows the CRSP U.S. Total Market Index. Its aim is to include virtually every investable U.S. stock there is. It includes nearly 3,500 companies across all market caps.
Tech (35%)Financials (12%)Communication Services (11%)
U.S. stock market performance this year, especially in the tech sector, has been driven by strong earnings growth. Years of hype have finally translated into rapid revenue and earnings growth. Not only has that led to solid returns for investors, but it has also meant that valuations have actually been shrinking. Concerns about stock valuations being expensive haven't entirely gone away, but they've been mitigated over the past couple of quarters.
What makes the case for small caps (and by extension the Vanguard Total Stock Market ETF) over the next couple of years is that they're expected to finally participate in the earnings growth expansion. In 2026, small caps are forecast to see stronger earnings growth than the S&P 500 for the first time in years.
Considering that the Vanguard S&P 500 ETF trades at a price-to-earnings (P/E) ratio of 27 and the Vanguard S&P Small-Cap 600 ETF (VIOO +0.32%) trades at just 18 times earnings, that provides a strong opportunity for small-cap performance to match or exceed the performance of large caps in the coming years.
The case for small caps makes the case for the Vanguard Total Stock Market ETF. If this performance catch-up ultimately happens, this ETF becomes the better play.