The AI investment boom continues to dominate U.S. equities in 2026. As of the Aug. 13 close, Sandisk had soared 544% year to date, making it the best-performing stock in the S&P 500. Dell Technologies, Seagate Technology, Micron Technology, Intel, Western Digital, Marvell Technology, Hewlett Packard Enterprise, Lumentum and Advanced Micro Devices round out the top ten. All ten are technology companies with significant exposure to surging artificial-intelligence spending.
Yet beneath this chip-led rally, small-cap stocks are quietly emerging as hidden winners. Since the start of 2026, small caps have outperformed mid-, large- and mega-cap stocks, as well as the S&P 500 and the Nasdaq-100.
In 2022, the S&P 500 fell 19% and the Nasdaq-100 dropped 33%. After OpenAI released ChatGPT for free on Nov. 30, 2022, U.S. markets entered a powerful AI-driven run led by technology and mega-cap growth names. In 2023, Bank of America analyst Michael Hartnett coined the term “Magnificent Seven” for Nvidia, Apple, Alphabet, Microsoft, Amazon, Meta Platforms and Tesla.
By 2026, the AI rally has broadened well beyond those names. The top ten S&P 500 performers are almost entirely chip, memory, networking and semiconductor-equipment companies benefiting from record AI capital spending. Micron Technology now has a market capitalization above $1 trillion.
Mega-cap dominance, however, is fading. Year to date, only Nvidia and Amazon among the Magnificent Seven are beating the S&P 500, while Meta Platforms and Tesla have declined. Semiconductor gains have certainly lifted the S&P 500 and Nasdaq-100, but the deeper shift is a rebound in mid- and small-cap stocks.
The Vanguard Morningstar Small-Cap ETF (VB) is one low-cost way to gain small-cap exposure. The fund charges an expense ratio of just 0.03% and holds 1,311 stocks. Its largest position accounts for only 0.54% of assets, far less concentrated than the S&P 500. By comparison, the top three holdings in the Vanguard S&P 500 ETF — Nvidia, Alphabet and Apple — together make up 20.5% of the fund.
Even after this year’s gains, the small-cap ETF trades at 22.3 times earnings, well below the Vanguard S&P 500 ETF’s 27.5 multiple. It also offers a dividend yield of 1.3%, versus 1.0% for the S&P 500 ETF.
Sector composition highlights the difference. Industrials account for 22.4% of the small-cap ETF, while technology and communications combined are just 16.8%. The S&P 500 ETF, by contrast, has 47.7% in technology and communications and only 8.8% in industrials. The small-cap fund also carries larger weightings in financials, healthcare, real estate and basic materials, giving it a more cyclical and value-oriented profile with much lower technology concentration.
For investors already holding large-cap S&P 500 stocks, buying another S&P 500 ETF can be redundant. The small-cap ETF provides exposure to more than 1,000 mostly unfamiliar small- and mid-cap names, offering meaningful diversification. Beneath the AI and chip stock frenzy, small caps stand out as a direction worth watching thanks to lower valuations and broader sector exposure.
