Why I'm Buying These 3 ETFs Hand Over Fist in 2026, Despite Cheap Stocks

For a seasoned investor, the radar is often full of cheap individual stocks-a classic temptation. The philosophy is straightforward: identify a business trading below its intrinsic value, buy it, and hold through the market's inevitable mispricing. This is the path that built fortunes, including that of Warren Buffett. For about fifteen years, that was my focus. Yet as time passes, a maturing perspective shifts the calculus. The choice isn't between cheap stocks and ETFs; it's between high-research, high-risk individual stock picking and the pursuit of reliable, diversified compounding.

The shift is strategic, not a surrender to convenience. It's about building a more robust portfolio "backbone" that performs well over time with minimal reliance on any single company's fate. This isn't about abandoning value; it's about applying it more broadly. The goal becomes capturing the long-term compounding power of entire market segments-small caps, real estate, or emerging tech-without the immense burden of picking the winners within them.

Consider the setup for 2026. The valuation gap between small caps and large caps is extreme, with the average small-cap trading at just 2.1 times book value versus over 5 times for the S&P 500. That presents a clear opportunity. Yet instead of diving into the research required to pick the next great small-cap story, I'm leaning into the Vanguard Russell 2000 ETF. It offers broad, low-cost exposure to this mispriced universe. History shows such gaps have often led to multi-year outperformance. By using an ETF, I gain the potential for that compounding while sidestepping the risk of getting it wrong on a single pick.

The same logic applies to other themes. Interest rates are expected to trend lower, a positive catalyst for real estate investment trusts. Rather than trying to forecast which REIT will outperform, I can use the Vanguard Real Estate ETF to capture the sector's broad value. Similarly, while AI investment accelerates, my specialty lies elsewhere. The Ark Autonomous Technology and Robotics ETF provides targeted exposure to a portfolio of potential AI winners without the need to evaluate each company individually.

This isn't a rejection of deep analysis. It's a reallocation of it. The research effort now goes into understanding the macro trends and valuations of entire asset classes, then letting a diversified ETF do the heavy lifting of execution. In a world of constant noise and volatility, this approach prioritizes the durability of the foundation over the high-stakes gamble of individual stock selection. For the long-term compounding investor, that may be the most disciplined move of all.

Rationale for Each ETF: Quality, Tailwinds, and Value

Let's examine each recommended ETF through the lens of intrinsic value, durable competitive advantages, and the long-term trends that can fuel compounding.

Schwab U.S. Dividend Equity ETF (SCHD): The Quality Compounder

SCHD is a pure-play on high-quality, cash-generating businesses with a proven track record of returning capital to shareholders. Its core investment thesis is straightforward: it tracks companies with over a decade of consecutive dividend increases. This screen is a powerful proxy for a wide competitive moat. Such firms typically possess durable business models, pricing power, and disciplined management-characteristics that allow them to consistently grow earnings and rewards to investors through economic cycles. The fund's 3.7% yield provides a tangible return while you wait for the underlying value to compound. Critically, this quality comes at a minimal cost, with a 0.06% expense ratio. For a value investor, this is the ideal setup: exposure to a basket of proven compounding engines at a frictionless price. The fund's appeal is amplified by the current market environment, where the valuation gap between these stable dividend payers and high-flying growth stocks has become stark.

Vanguard Utilities ETF (VPU): The Regulated Moat with a Near-Term Price Check

The utilities sector offers a classic example of a durable, regulated moat. These companies provide essential services-electricity-with predictable, inelastic demand. This creates a stable cash flow stream, a key ingredient for reliable dividend growth. VPU provides broad, low-cost exposure to this sector, with an expense ratio of 0.09% and over $7.78 billion in assets. The long-term tailwind is clear: rising energy demand and the sector's pricing power support the case for continued gains. Yet, the current price tells a different story. Forecasts indicate the ETF is expected to trade at an average of $158.97 in 2026, a decline of over 14% from its current level. This near-term pressure suggests the market is pricing in near-term headwinds, perhaps related to interest rate sensitivity or regulatory uncertainty. For the long-term investor, this presents a tension. The fundamental moat remains intact, but the entry price is not optimal. It's a reminder that even high-quality assets can be poor value at the wrong price.

Vanguard International Growth ETF (VWILX): The Value-Seeking Growth Engine

VWILX targets a different kind of opportunity: higher-growth markets abroad, where valuations often lag their U.S. counterparts. The fund's strategy is to diversify across developed and emerging markets, selecting companies with above-average growth potential. The core value proposition here is relative cheapness. As noted, international growth stocks trade at lower valuations than U.S. peers. This creates a potential margin of safety. The long-term trend supporting this ETF is the projected higher growth rates in many foreign markets. By investing in this ETF, an investor gains exposure to a broader pool of growth stories while sidestepping the intense competition and high valuations of the U.S. market. The risk is that these lower valuations may reflect legitimate concerns about growth or stability. The opportunity is that they may also represent a mispricing of future potential. For a patient investor, this is a bet on global convergence and the compounding power of companies in faster-growing economies.

Catalysts, Risks, and What to Watch

For any investment thesis, the forward view is where conviction is tested. The catalysts for the ETFs discussed are clear, but so are the risks that could challenge them.

The primary catalyst for both the utilities and international growth ETFs is a sustained shift in interest rates and global growth. For utilities, a decisive move lower in rates is the key. As noted, lower rates are a positive catalyst for real estate investment trusts, and the same dynamic applies to regulated utilities. Cheaper financing improves their economics, while lower discount rates can boost the present value of their stable future cash flows. The long-term demand tailwind for electricity, driven by decarbonization and electrification, is a structural support. For international growth, the catalyst is a re-rating based on global convergence. If projected higher growth rates in foreign markets materialize, and if valuations remain anchored to lower multiples, the relative value proposition strengthens. The current gap between international and U.S. growth stocks is a potential springboard.

A more immediate risk, however, is the crowded nature of the ETF landscape itself. The sector is booming, with over 1,100 new ETFs launched last year alone. This product proliferation can lead to crowded trades, where popular themes become overvalued simply because of their popularity. When an ETF's price rises faster than the underlying fundamentals of its holdings, the margin of safety erodes. This is a particular vulnerability for thematic ETFs, which may see their performance decouple from the broader market. The risk is not that the theme is wrong, but that the price paid for it is too high.

Regulatory developments also warrant close monitoring. The SEC's ongoing approval of new ETF structures, including potentially more complex or niche products, can reshape the competitive landscape. While this innovation expands choice, it also introduces new variables and potential for regulatory friction. For now, the focus should remain on the core drivers: interest rates for utilities and global growth for international exposure.

The bottom line for the value investor is patience. These ETFs are not meant for quick trades. They are tools for capturing long-term trends and mispricings. The catalysts are macroeconomic and structural, unfolding over years, not quarters. The risks-crowding and regulatory shifts-are manageable with disciplined monitoring. By focusing on the durable moats and relative value, the investor can let time work in their favor.