NEW YORK, July 12, 2026 – The Vanguard Russell 2000 ETF (NASDAQ:VTWO) has delivered a stellar 20.74% net asset value return through the first half of 2026, significantly outpacing the Vanguard S&P 500 ETF (NYSEARCA:VOO) by 9.40 percentage points. However, a closer look reveals that the fund's performance is now tied to a different set of stocks than the one that drove its gains earlier this year.
The shift stems from the annual Russell index reconstitution, which took effect after the market close on June 26. As a result, six of VTWO's top ten holdings as of May 31 have been moved to the Russell 1000 index, representing a notable change in the fund's composition. These six stocks accounted for 5.28% of VTWO's assets at the end of May and made up about 70% of the weight of its top ten holdings at that time.
The departing stocks include Bloom Energy (NYSE:BE), Credo Technology Group (NASDAQ:CRDO), Fabrinet (NYSE:FN), NextPower (NASDAQ:NXT), Coeur Mining (NYSE:CDE), and EchoStar (NASDAQ:ECHO). Their combined weight of 5.28% has now been removed from the fund, leaving VTWO with a portfolio that no longer reflects the same mix that generated its strong first-half returns.
This reshuffling is particularly significant because AI infrastructure stocks—spanning power, hardware, and networking—have been key drivers of the Russell 2000's performance in 2026. According to Goldman Sachs (NYSE:GS), these stocks contributed roughly 40% of the index's gains this year. However, the index reconstitution reduced their weight in the Russell 2000 from 15% to 7%, potentially dampening future returns from this high-growth sector.
The impact of index construction is evident when comparing VTWO's performance to other small-cap funds. The Vanguard Small-Cap ETF (NYSEARCA:VB) is up 16.36% year-to-date, while the Vanguard Small-Cap Value ETF (NYSEARCA:VBR) has gained 15.40% through Friday. This leaves VTWO with a lead of 4.38 and 5.34 percentage points over these two funds, respectively.
VBR trades at 17.8 times portfolio earnings, a significant discount to the S&P 500's 28.1 times multiple. However, the discount alone hasn't been enough to outperform VTWO, as the market has favored fast-moving growth stocks over cheaper valuations this year.
Looking ahead, small-cap stocks have recently stumbled. The Russell 2000 posted a 0.61% decline last week, marking its first two-week losing streak in four months. Meanwhile, the S&P 500 rose 1.23%, and the Nasdaq climbed 1.74%. Rising Treasury yields, with the 10-year note moving to around 4.56% from 4.49%, have weighed on cash-dependent small-cap companies.
Investors will be watching next week's economic data closely, including June CPI on Tuesday, PPI on Wednesday, and retail sales on Thursday. Bank earnings from JPMorgan Chase (NYSE:JPM) and Goldman Sachs are also due Tuesday. "A lot of factors coming to a head all at once," said Michael Reynolds, vice president of investment strategy at Glenmede.
Goldman's Ben Snider noted that about 30% of Russell 2000 debt carries floating rates, compared to just 7% for the S&P 500, and 29% of the index is not profitable. "The combination of elevated valuations and near-trend US economic growth points to low single-digit Russell 2000 returns in the next 12 months," he wrote. While weaker inflation and steady lending could sustain the small-cap rotation, VTWO's impressive 20.74% gain no longer reflects the portfolio that investors currently hold.
