ETF Strategies to Capitalize on a Fourth-Year Bull Market in 2026

The U.S. equity market is entering its fourth year of a bull run, with the S&P 500 having surged 91% from its October 2022 low. This performance, driven largely by a narrow concentration of seven mega-cap technology stocks-Amazon, Alphabet, Apple, Broadcom, Meta, Microsoft, and NVIDIA-has created both opportunities and risks for investors in 2026. Historical patterns suggest that bull markets in their fourth year tend to deliver robust returns, averaging 12.8% since 1950, but current conditions are marked by elevated valuations, sector concentration, and macroeconomic uncertainties.

Historical Context and Market Dynamics

Bull markets in their fourth year have historically demonstrated resilience, supported by low recession risks and strong corporate earnings growth. However, the current cycle diverges from past norms in key ways. The S&P 500's forward price-to-earnings (P/E) ratio is significantly above historical averages, indicating that much of the recent gains have been driven by valuation expansion rather than earnings growth. . This dynamic raises concerns about sustainability, particularly as the market anticipates Federal Reserve rate cuts and political stimulus measures.

The dominance of technology stocks-accounting for nearly half of the S&P 500's gains-further complicates the outlook. While innovation in artificial intelligence (AI) and semiconductors has fueled this rally, overreliance on a few names increases systemic risk. As one analyst notes, "The current bull market is more concentrated than historical cycles, creating vulnerabilities if earnings growth in these sectors slows or valuations correct."

ETF Strategies for a Fourth-Year Bull Market

Given these dynamics, investors should adopt a diversified and active approach, leveraging low-cost index ETFs to balance growth potential with risk management. Below are three strategic categories of ETFs aligned with historical bull market patterns and 2026's evolving landscape:

1. Growth-Oriented ETFs for AI-Driven Momentum

For investors seeking to capitalize on the ongoing AI revolution and tech-led growth, the Invesco QQQ Trust (QQQ) remains a compelling option. Tracking the Nasdaq-100 index, QQQ provides exposure to leading technology and AI-driven companies, including NVIDIA and Microsoft, which have been central to the bull market's momentum. Historically, the Nasdaq-100 has outperformed the S&P 500 during bull market cycles, particularly in years marked by innovation-driven growth.

Complementing this, the Vanguard Growth ETF (VUG) offers broader exposure to growth stocks within the S&P 500, with a 17.2% average annual return over the past decade. Its low expense ratio (0.05%) and diversified portfolio make it an efficient vehicle for capturing the broader growth narrative without overconcentration in a single sector.

2. Defensive ETFs for Risk Mitigation

As valuations stretch and macroeconomic uncertainties persist, defensive strategies become critical. The iShares Russell 2000 ETF (IWM), which tracks small-cap stocks, is positioned to benefit from a broadening bull market. Currently trading at a P/E ratio of 18.3-nearly 40% lower than the S&P 500-small-cap stocks offer a more attractive valuation backdrop. Analysts argue that as the bull market matures, gains may shift from large-cap tech to small-cap AI enablers and cyclical sectors.

For income-focused investors, the SPDR Portfolio S&P 500 High Dividend ETF (SPYD) provides exposure to high-yield, defensive sectors like Consumer Staples and Utilities. With a 4.43% yield and a low expense ratio of 0.03%, SPYD offers a stable income stream while cushioning against volatility in growth-oriented assets.

3. Diversified ETFs for Balanced Exposure

A third approach combines growth and defensive characteristics to navigate market rotations. The Schwab U.S. Dividend Equity ETF (SCHD), for instance, focuses on companies with strong fundamentals and consistent dividend growth. Its performance has improved relative to the S&P 500, making it a resilient option as tech-driven momentum wanes. Similarly, the WisdomTree U.S. Quality Dividend Growth ETF (DGRW) blends growth and value traits, targeting firms with robust cash flows and dividend histories.

For global diversification, the Vanguard International High Dividend Yield ETF (VYMI) offers exposure to non-U.S. markets, including cyclical sectors like financials and energy. With a 3.8% yield and reduced tech exposure, VYMI positions investors for a potential rotation toward international cyclicals as the bull market evolves.

Conclusion: Navigating the 2026 Bull Market

The fourth year of a bull market historically offers strong returns, but current conditions demand a nuanced strategy. While growth-oriented ETFs like QQQ and VUG can capitalize on AI-driven momentum, defensive and diversified options such as IWM, SPYD, and SCHD are essential for managing risks tied to high valuations and sector concentration. Investors should also consider rebalancing portfolios to reflect shifting macroeconomic signals, including potential rate cuts and geopolitical developments.

As the market approaches 2026, the key to success lies in balancing optimism with prudence. By leveraging low-cost index ETFs that align with both historical patterns and emerging trends, investors can position themselves to thrive in a dynamic and evolving landscape.