Top ETFs for 2026: Equity Rotation After Bond Dominance in 2025

As of mid-December 2025, fixed-income investors have enjoyed a standout year. Convertible bond strategies led the charge amid a stabilizing rate environment post the Federal Reserve's easing cycle. The Calamos Convertible Equity Alternative ETF (CVRT) topped fixed-income returns with approximately 30% gains, followed by the First Trust SSI Strategic Convertible Securities ETF (FCVT) at 21.4% and the iShares Convertible Bond ETF (ICVT) at 20%. These hybrid securities captured equity upside while providing bond-like downside protection as stocks climbed.

Broader bond categories delivered more modest results in a range-bound yield landscape, but convertibles and select emerging market local currency funds stood out. Meanwhile, equities posted uneven gains, with thematic sectors like technology and defense shining amid AI momentum.

Looking ahead, the Fed's December projections signal a federal funds rate settling around 3.0-3.25% longer-term, with limited cuts anticipated in 2026 (median dot plot shows one). U.S. GDP growth is forecasted at 1.8-2.3% for 2026, supporting resilient corporate earnings—analysts project S&P 500 EPS growth of 12-15%. Wall Street targets for the S&P 500 in 2026 range from 7,500 (JPMorgan, HSBC) to 8,100 (Oppenheimer), implying mid- to high-teens upside driven by AI productivity and potential policy support.

With bond momentum likely cooling, capital rotation toward equities appears probable. Focus on growth themes, undervalued segments, and diversification for 2026.

1. AI and Technology Growth

AI adoption accelerates enterprise spending and data center buildouts, fueling mega-cap leaders while spilling into broader tech.

• Vanguard Information Technology ETF (VGT): 314 holdings weighted toward Nvidia, Microsoft, and Apple; expense ratio 0.10% for efficient AI exposure.
• Invesco QQQ Trust (QQQ): Nasdaq-100 tracking for concentrated mega-cap growth; consistent outperformance in tech-driven markets.

2. Small- and Mid-Cap Opportunities

Lower rates benefit debt-reliant smaller firms, with valuations at historic discounts to large-caps.

• Vanguard Russell 2000 ETF (VTWO): Nearly 2,000 small-cap stocks for broad catch-up potential.
• Vanguard Mid-Cap Value ETF (VOE): Undervalued mid-caps blending growth and income; attractive in rotation scenarios.

3. Real Estate Rebound

REITs remain rate-sensitive and undervalued post multi-year lag; easing borrowing costs could spark recovery.

• Vanguard Real Estate ETF (VNQ): Diversified U.S. REITs across commercial, residential, and industrial; poised for gains as financing improves.

4. International and Emerging Markets

Cheaper valuations abroad versus U.S. exceptionalism; select regions offer growth without China risks.

• Vanguard FTSE Developed Markets ETF (VEA): Europe, Japan, and Pacific exposure with reforms and undervalued stocks.
• Vanguard Emerging Markets ex-China ETF (VEXC): Targets India, Taiwan, and other high-growth areas, sidestepping geopolitical concerns.

5. Thematic Sectors: Clean Energy, Defense, and Dividends

AI-driven power demand boosts clean energy; geopolitics sustains defense; dividends provide stability.

• iShares Global Clean Energy ETF (ICLN): Renewables and nuclear for surging electricity needs.
• Global X Defense Tech ETF (SHLD): Elevated global spending on security tech.
• Schwab U.S. Dividend Equity ETF (SCHD): Quality dividend payers for income amid volatility.

Key Considerations for 2026 Investing

While 2025 rewarded fixed-income patience, 2026 favors equities in a lower-rate, growth-oriented environment—but risks abound. Earnings delivery is paramount: Consensus 12-15% S&P 500 EPS growth hinges on AI productivity gains and consumer resilience. Disappointments could pressure valuations, currently elevated at ~22-25x forward earnings.

Rate path uncertainty persists. The Fed's cautious stance (one cut projected) reflects balanced risks—inflation reacceleration from policy shifts versus softening labor data. Monitor incoming data closely; unexpected pauses or hikes could favor defensives.

Diversification is essential. Blend growth (tech/AI) with value/size factors (small/mid-caps, international) to mitigate concentration risks in mega-caps. Maintain 10-20% fixed-income ballast (e.g., intermediate Treasuries or corporates) for volatility spikes.

Geopolitical and policy wildcards loom: Trade tensions, fiscal stimulus, or election fallout could amplify volatility. Emerging markets offer upside but currency/political risks.

Risk tolerance and horizon matter. Aggressive investors may overweight growth/thematics; conservative ones prioritize dividends/quality. Rebalance regularly—sector rotations (e.g., cyclicals over tech) could broaden leadership.

Tax efficiency favors ETFs in taxable accounts. Consider dollar-cost averaging to navigate uncertainty.

Ultimately, align with personal goals. Long-term compounding in diversified, low-cost ETFs has historically outperformed timing attempts. Stay disciplined amid headlines.

Disclaimer: This article is for informational purposes only and not investment advice. Past performance does not guarantee future results. Investments carry risk, including loss of principal. Consult a financial advisor before making decisions.