Dividend ETF beats S&P 500 by 3 points in 2026 despite tech rally

The Vanguard High Dividend Yield ETF (VYM) is outperforming the S&P 500 by roughly 3 percentage points year to date in 2026, a notable achievement at a time when technology and artificial intelligence stocks continue to dominate market headlines. VYM uses a straightforward construction strategy: it calculates the forecast 12-month dividend yield for a broad universe of U.S. stocks and includes the top half of those ranked by yield in its final portfolio. The fund currently holds more than 600 stocks and yields around 2.3%.

The fund's outperformance stems not from riding the tech rally but from overweights in sectors that have performed well outside the AI boom. Energy stocks represent roughly 9% of VYM's portfolio and industrial stocks roughly 15%, and these overweights have been the real drivers of gains this year. In contrast, VYM allocates only around 15% to tech, meaning it has missed some of the broader market rally but avoided the concentration risk. The fund also holds 21% in financials, which have not contributed much to its gains. VYM trades at a forward price-to-earnings ratio of 16, compared to a multiple of 23 for the Vanguard S&P 500 ETF (VOO), indicating that the fund has captured cheaper valuations across its holdings.

The conditions supporting VYM's outperformance may extend into the future if monetary policy remains restrictive. The article notes that it is increasingly unlikely the Fed will cut rates in 2026 or even well into 2027. Tech stocks have benefited not only from strong earnings but also from an assumption that the Fed would ease financial conditions; if the Fed hikes rates instead, that tailwind could disappear. Inflation is expected to remain stubbornly high, especially if the Iran war continues or if President Donald Trump implements tariffs as suggested. These factors—higher rates and persistent inflation—typically favor value and defensive stocks over growth and AI stocks. Investors have already begun rotating toward value and defensive positions in 2026, a momentum the author expects to continue given the macro environment.

The Vanguard High Dividend Yield ETF's outperformance in 2026 reflects a notable shift in market dynamics despite the continued headlines around tech and artificial intelligence. While tech and AI stocks have driven much of the S&P 500's gains, VYM's roughly 3 percentage point lead suggests that value and dividend-paying stocks in energy and industrials are finding favor among investors. This rotation may be tied to expectations about monetary policy: the article notes that it is increasingly unlikely the Fed will cut rates in 2026 or into 2027, removing a key tailwind that has supported growth and AI stocks. With inflation expected to remain elevated due to geopolitical tensions and potential tariffs, the conditions favor economically sensitive and defensive sectors over the expensive growth names that have dominated.

VYM's valuation advantage is stark—at a forward P/E of 16 versus 23 for the broader market—suggesting the fund has captured stocks that the market has repriced lower relative to earnings. Although the fund holds only around 15% in tech (missing some gains) and 21% in financials (which have not contributed much), the net effect of its overweights in energy and industrials has been positive. The article indicates investors have already begun pivoting back toward value and defensive stocks, a trend the author suggests is likely to continue if rate expectations and inflation pressures persist.