Two ETFs to Implement Goldman's 2026 Structural Shift

The investment case for 2026 is built on a powerful, if uneven, . Goldman Sachs Research forecasts sturdy global growth of 2.8% next year, with the U.S. economy expected to outperform at due to tax cuts, easier financial conditions, and a fading drag from tariffs. Yet this growth is occurring alongside a stubbornly stagnant labor market, . This combination creates a favorable environment for equities but one that is unlikely to deliver the market-beating returns of recent years.

The result is a clear signal for portfolio strategy. While the S&P 500 is projected to climb to , . This gap between near-term optimism and a tepid long-term outlook is the core of the thesis. It suggests that the easy money from broad market rallies may be behind us, making active selection essential to avoid being left with the index's average, and likely subpar, returns.

The structural shift is one of dispersion. With growth front-loaded and labor market pressures limiting wage-driven inflation, the focus must shift from passive ownership to active allocation. This means seeking out companies and sectors that can capitalize on the economic tailwinds-like those benefiting from tax cuts and AI productivity gains-while avoiding those exposed to the stagnation in hiring and wage growth. It also means looking beyond the U.S. market, where international developed equities currently trade at a significant discount to the S&P 500, offering a potential source of outperformance.

The bottom line is that the macro setup favors a tactical, selective approach. The sturdy growth story provides a floor for equity valuations, but the stagnant jobs narrative caps the upside. In this environment, passive indexing risks delivering a return that is merely adequate. The path to better results lies in active management-rotating into undervalued segments, capitalizing on sector-specific catalysts, and navigating the inevitable volatility of a market that is no longer on a one-way street.

1: iShares Core S&P Small-Cap ETF (IJR) for Cyclical Rotation

The case for small caps is now a story of catching up. After trailing the S&P 500 for three years, the Russell 2000 has created a clear valuation and momentum opportunity. This underperformance sets the stage for a cyclical rotation, a move that Goldman Sachs forecasts will be front-loaded in early 2026. The firm sees a combination of accelerating and above-consensus US economic growth alongside below-consensus inflation and continued Fed easing as the catalyst. In this environment, small-cap stocks are positioned to benefit from both lower financing costs and a potential surge in merger and acquisition activity.

The iShares Core S&P Small-Cap ETF (IJR) provides a direct, low-cost vehicle to capture this anticipated broadening of the market rally. It offers broad exposure to the entire small-cap universe, making it a core holding for investors seeking to rotate capital from the crowded mega-cap space into overlooked segments. The ETF's passive, cap-weighted structure ensures it will participate in any general small-cap upcycle, while its expense ratio keeps costs minimal for long-term positioning.

The bottom line is that IJR is a tactical bet on a macro shift. With Goldman Sachs pointing to small-cap upside in early 2026 and the Russell 2000's significant lag creating a fertile setup, this ETF offers a straightforward way to position for a market that is due to broaden. It is a vehicle for capturing the next leg of the rally, not a speculative stock pick.

ETF 2: Vanguard FTSE Developed Markets ETF (VEA) for Diversification and Value

For investors seeking to temper the risks of a concentrated U.S. portfolio, international developed markets offer a compelling secondary vehicle. The case is built on stark valuation differences and a powerful recent performance. In 2025, the developed world delivered a , . Yet, this outperformance came at a significant discount, . This gap presents a clear opportunity: to capture growth while paying a more reasonable price.

The Vanguard FTSE Developed Markets ETF (VEA) is a practical and efficient way to access this advantage. It provides wide diversification across large-, mid-, and small-cap companies in developed economies outside the U.S., spanning Europe and the Pacific. This breadth acts as a natural hedge, spreading exposure across different economic cycles and regulatory environments. It reduces reliance on any single market, including the U.S., and can help smooth portfolio returns over time.

VEA is also a low-cost, liquid core holding. With an identical , it offers scale and deep liquidity. , . For an investor looking to rotate into international markets or simply add a defensive, value-oriented component to a U.S.-centric portfolio, VEA provides a straightforward, cost-effective solution.

Implementation and Risk Considerations

For investors seeking to operationalize the forecast for sturdy growth and economic security, a strategic allocation between domestic and international equities provides a balanced entry point. The recommended approach is to align ETF choices with individual risk tolerance. The iShares Core S&P Small-Cap ETF (IJR) targets cyclical rotation, offering exposure to the small-cap segment that Goldman Sachs expects to benefit from a broadening market rally and potential M&A activity in 2026. Conversely, the Vanguard FTSE Developed Markets Index Fund ETF (VEA) delivers diversification and value, capitalizing on the fact that international developed markets outperformed the S&P 500 in 2025 and trade at a more attractive valuation multiple.

A critical guardrail for this portfolio is monitoring the labor market for signs of deterioration, particularly among college-educated workers. Goldman Sachs notes that the unemployment rate for this key demographic has risen significantly since its 2022 lows, . A further weakening in employment for this group, which accounts for a large share of U.S. labor income, could have a disproportionate negative impact on consumer spending and prompt the Federal Reserve to deliver more rate cuts than currently anticipated. This would be a primary trigger for a shift in the monetary policy outlook that could affect both domestic small-cap valuations and the broader growth narrative.

Finally, investors must remain vigilant to geopolitical developments and trade policy shifts that could disrupt the forecast for resilient supply chains and energy security. The 2026 outlook explicitly identifies economic security as a dominant theme, driven by reindustrialization efforts and the imperative for resource resilience. However, this setup is contingent on a stable global order. Any escalation in geopolitical tensions or a reversal of the trend toward shorter, more secure supply chains could introduce significant volatility and challenge the performance of companies positioned for this shift. The bottom line is that while the macro forecast points to sturdy growth, the path is not guaranteed and requires active monitoring of labor trends and global stability.