ETF Industry Perspectives 1Q 2026
Expert Perspective
|February 10, 2026
ETF Industry Perspectives Q1 2026
Vanguard ETF industry perspectives is our quarterly in-depth commentary with analysis of key trends and how they’re affecting ETF investors.
Key highlights
Fixed income spotlight: Last year was strong for fixed income markets, with the broad U.S. bond market posting a 7.5% total return. Bond yields remain near decade highs, and we believe that it’s time for advisors to rethink client allocations to bonds. At the core of this insight is that more than half of total returns from the bond market were derived from income returns in 2025. And the Vanguard Economic and Market Outlook for 2026 suggests that attractive bond yields are likely to be here for a while.
Equity spotlight: About 40% of all ETF flows went to Standard & Poor’s 500 Index strategies in 2025. Advisors are facing the possibility of client portfolios being overallocated to large-cap tech and tech-related stocks that compose about one-third of the index’s market capitalization. Some advisors have begun to address the S&P 500’s expanding large-cap bias by tilting client portfolios toward small- and mid-cap stocks. Another option is to lean into the S&P Completion Index, which would provide greater exposure to mid-, small-, and micro-cap stocks and introduce a value tilt.
Bonds are back—particularly the “income” part of fixed income
For investors, 2022 was painful. The Federal Reserve raised interest rates by more than 500 basis points to control inflation, causing both stock and bond prices to plunge.1 Bond prices, in particular, fell to an extent not experienced in 40 years.
But the pain of 2022 was required to end a lost decade-plus in fixed income and restore the role of bonds in portfolios, ushering in a new era. We believe it’s time for advisors to rethink their client allocations to bonds. After all, 2022 was truly an outlier for bond market returns, as the Figure 1a chart below shows.
With yields now near their highest levels since before the global financial crisis and yield curves normalizing, it’s probably time for investors to confront their bad memories of 2022 and give bonds the fresh look they deserve. The Vanguard Economic and Market Outlook for 2026 suggests that attractive bond yields will be here for a while, creating opportunities for advisors to add value by expanding client allocations to fixed income.2
Since the inception of the Bloomberg U.S. Universal Index, income return has represented the vast majority of total return, as seen in the Figure 1b chart below.3 In 2025, when the broad U.S. bond market registered a 7.5% total return, most of that came from income.4
The past three years have been characterized by a return to normality. An easy way to appreciate the current bond market dynamics is that you’d have to go back to 2012 to find the last time annual income return was above 4% for broad fixed income markets.5
Income is driving relatively attractive bond returns
1a. Cumulative returns for the Bloomberg U.S. Universal Index
Note: This chart shows price return and total return over time, with the latter including the income-return component that reflects ongoing compounding.
Source: Bloomberg, from January 31, 1990, through November 28, 2025.
1b. Historical fixed income performance highlights the outlier status of 2022
Notes: This chart shows the cumulative performance from January through December for each calendar year going back to 1928. The frequency refers to the number of individual years that are contained in a given bar, with the majority of years clustered in a performance range between about 0% and 9%. Data are through December 31, 2025.
Sources: Vanguard Investment Advisory Research Center analysis, using data from Morningstar, Inc., including the IA SBBI U.S. Intermediate-Term Government Bond Index through 1972, Bloomberg Intermediate U.S. Government/Credit Bond Index from 1973 through 1975, and Bloomberg U.S. Aggregate Bond Index thereafter.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Fed rate cuts pose challenges but also point to opportunities
Since the federal funds rate peaked in the summer of 2023 at 5.25%–5.50%, the Federal Reserve has cut the policy rate by 175 basis points to between 3.50% and 3.75%.6
Investors scarred by the bond market disappointment of 2022 can’t be faulted much for clinging to the short end of the yield curve. Treasury bills outyielded the Bloomberg U.S. Aggregate Bond Index for nearly 20 months between March 2023 and December 2024, but that juicy yield has declined steadily since then.7
Many investors still have large allocations in money market funds or ultrashort bonds. But that trade is growing less rewarding with each Fed rate cut, forcing investors to ask themselves the question: What’s next?
With the Fed resuming rate cuts, it’s likely the time to explore the possibility of locking in higher yields by going further out on the yield curve. Specifically, investors should consider targeting a portfolio duration closer to that of a core bond portfolio (4–6 years).
Furthermore, given high equity valuations and the uncertainty around the AI trade, owning high-quality fixed income could offer investors a true diversifier should there be a risk-off event in markets that causes equities to underperform.
A key moment
The “income” in fixed income is calling for investors’ attention, and we believe now is the time for advisors to rethink their approach to fixed income in client portfolios. Initiating positions in the current environment can secure attractive yields for longer while improving portfolio diversification.
Finding ways to manage the growing top-heaviness of the S&P 500
As the U.S. equity market continues to climb on bullishness surrounding the integration of AI into the macroeconomy, concerns about overallocation to tech stocks also continue to preoccupy investors.
That’s partly because a high percentage of ETF inflows are going into S&P 500 Index strategies—including 41% of all ETF flows in 2025—as shown in the accompanying chart.8
Moreover, the S&P 500 is becoming increasingly top-heavy with high-flying tech and tech-related stocks that together composed about one-third of the index’s market capitalization as of December 2025.9
This top-heaviness has fueled concerns that, for equity investors, the S&P 500 itself is not enough to ensure proper diversification.
S&P 500 ETF inflows have constituted a high percentage of total U.S. equity inflows in recent years
Note: The S&P 500 Index strategies include Vanguard S&P 500 ETF (VOO), iShares Core S&P 500 ETF (IVV), SPDR® S&P 500® ETF Trust (SPY), and State Street® SPDR® Portfolio S&P 500® ETF (SPYM).
Source: Morningstar, Inc., from January 1, 2020, through December 31, 2025.
Advisors pivoting
Our research has shown that advisors are already addressing concerns surrounding the top-heaviness of the S&P 500, which has tilted the index toward large-cap equities and an overweight to tech-sector holdings.
Many of the advisors we surveyed said that they’re underweighting large-cap stocks and tilting client portfolios toward small- and mid-cap stocks. Overall, around 75% of the portfolios in the survey were underweight large-cap, and about three-fourths were overweight small- and mid-cap.10
Broad index ETF solution
A size and sector tilt similar to the one that advisors are implementing can be achieved by leaning away from the S&P 500 and into the S&P Completion Index.
The S&P Completion Index includes individual names that aren’t part of the S&P 500, such as mid-, small-, and even micro-cap stocks that can help offset the S&P 500’s large-cap bias. Additionally, integrating the S&P Completion Index can bring a value tilt to a portfolio skewed to growth by large allocations to the S&P 500.11
The accompanying chart shows how sector allocations between the S&P 500 Index and the S&P Completion Index differ.
Using the S&P Completion Index could provide advisors with a relatively straightforward method to effectively manage asset allocations as the top-heaviness of the S&P 500 evolves in real time.
Comparing sector concentrations of the S&P 500 Index and the S&P Completion Index
Source: FactSet, as of November 28, 2025.
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ETF Industry Perspectives Q1 2026: Why bonds are back and how to manage large-cap equity tilts
A quarterly brochure on the U.S. ETF ecosystem, with information designed to give advisors tools to help clients.
1 Federal Reserve Bank of St. Louis, using Federal Reserve Economic Data, from September 2021 through July 2023.
2 Vanguard research, as of December 10, 2025.
3 According to Bloomberg, the U.S. Universal index was created on January 1, 1999, with the index history backfilled to January 1, 1990.
4 Bloomberg, using the Bloomberg U.S. Universal Index, as of December 31, 2025.
5 Bloomberg, using the Bloomberg U.S. Universal Index, from July 2012 through November 2025.
6 Federal Reserve Bank of St. Louis, using Federal Reserve Economic Data, from June 1, 2023, through December 31, 2025.
7 Federal Reserve Bank of St. Louis, using Federal Reserve Economic Data, from March 2023 through December 2025.
8 Morningstar, Inc., as of December 31, 2025. The S&P 500 Index strategies include Vanguard S&P 500 ETF (VOO), iShares Core S&P 500 ETF (IVV), SPDR® S&P 500® ETF Trust (SPY), and State Street® SPDR® Portfolio S&P 500® ETF (SPYM).
9 FactSet, as of December 31, 2025. The so-called “Magnificent Seven” stocks composing approximately one-third of the S&P 500 Index’s market capitalization include Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
10 Vanguard Portfolio Analytics and Consulting research, as of June 30, 2025.
11 Morningstar, Inc., as of November 28, 2025.
Important information
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