High-quality stocks ETF outperforms S&P 500

What happened: High-quality stocks ETFs have outperformed the S&P 500 in 2026. The Pacer US Cash Cows 100 ETF (COWZ), focusing on free cash flow yield, is up 9% year-to-date and 25% over the trailing year. The Vanguard S&P 500 Growth ETF (VOO) has returned 10%, while the S&P 500 index gained 8%. The Vanguard Dividend Appreciation ETF (VIG) and Schwab U.S. Dividend Equity ETF (SCHD) have also outperformed, providing growing income streams.

Market impact: Quality-focused ETFs have driven outperformance, benefiting sectors like technology, consumer discretionary, and healthcare. These ETFs offer broad market beta with a quality tilt, historically limiting downside risk. Investors have favored growth and tech stocks, with Vanguard's tech and growth ETFs seeing significant inflows. The outperformance of quality ETFs has encouraged investors to allocate more to these funds, potentially leading to further rebalancing into high-quality stocks.

What to watch next: On October 29, 2026, the S&P 500 companies will report Q3 earnings, providing insights into the earnings quality and growth prospects of the index's constituents. On November 15, 2026, the Federal Reserve is set to announce its interest rate decision, which could impact the valuation of growth stocks and ETFs. Additionally, investors should monitor the performance of the Vanguard S&P 500 Growth ETF (VOO) relative to the S&P 500 index, as it has been a key outperformer and could continue to drive the narrative around growth-focused ETFs.