Some of my favorite stocks have become much cheaper recently, but ETFs remain a big focus of my investment strategy.
Some of my favorite stocks have pulled back from their recent highs and have become quite attractive. And there are some others — especially in the realm of dividend stocks — that look extremely cheap as we head into 2026.
However, ETFs remain a big part of my investment strategy. In fact, I’m planning to allocate half of my retirement account contributions to ETFs in 2026, more than I have in previous years, as building a “backbone” to my investment portfolio has become a priority. Plus, there are some highly attractive ETFs on my radar right now. Here are three in particular I’m planning to buy aggressively in the new year.
Image source: Getty Images.
Small caps are cheap
At the start of 2025, small cap stocks were trading for their lowest valuations relative to their large-cap counterparts since the 1990s. This is partially due to the rapid growth in megacap technology stocks, but large caps have been outperforming smaller companies for years. What’s more, throughout 2025, the valuation gap got even bigger. In fact, the average stock in the Russell 2000 small-cap index trades for 2.0 times book value. For the average S&P 500 component, the ratio is a much higher 5.2 times book value. That’s a big difference.
There are some catalysts that could finally help the valuation gap shrink in 2026. For one thing, lower interest rates favor small cap outperformance for a few reasons. As an example, smaller companies tend to rely on debt more than larger companies.
The Vanguard Russell 2000 ETF (VTWO +1.16%) is the ETF I bought the most of in 2025, and it’s still toward the top of my watch list. It tracks an index of 2,000 smaller companies, and no individual stock makes up more than 1% of the fund’s total assets.
Lots of cheap income stocks
The real estate sector has underperformed the market for the past decade or so, with pandemic-related disruptions and elevated interest rates being the key reasons. But there are some extremely attractive opportunities to buy real estate investment trusts, or REITs, right now, and the Vanguard Real Estate ETF (VNQ +0.49%) could be a top performer in 2026 and beyond for patient long-term investors.
Today’s Change
(0.49%) $0.43
Current Price
$89.61
Key Data Points
Market Cap
$0B
Day’s Range
$89.26 – $89.92
52wk Range
$76.92 – $95.13
Volume
3.9M
Avg Vol
0
Gross Margin
0.00%
Dividend Yield
N/A
This ETF tracks an index of REITs and offers a 4% dividend yield. It can be a great way to get exposure to some of the largest and most stable real estate operators in the world, such as Prologis (PLD +0.84%), Digital Realty Trust (DLR 0.63%), and healthcare real estate company Welltower (WELL 3.24%), just to name a few.
My favorite AI ETF
So far, I’ve discussed value and income ETFs, but now I’ll go in a different direction by discussing my favorite AI play. To be sure, I own a few stocks directly that are massive beneficiaries of the AI boom, such as Advanced Micro Devices (AMD 0.53%) and Amazon (AMZN 0.92%).
Ark ETF Trust – Ark Autonomous Technology & Robotics ETF
Today’s Change
(1.19%) $1.38
Current Price
$117.28
Key Data Points
Market Cap
$0B
Day’s Range
$113.65 – $117.32
52wk Range
$55.53 – $125.31
Volume
28K
Avg Vol
0
Gross Margin
0.00%
Dividend Yield
N/A
However, the top artificial intelligence ETF on my radar focuses on smaller, outside-the-box AI stocks. The Ark Autonomous Technology & Robotics ETF (ARKQ +1.19%) is an actively managed ETF, not an index fund, and notable tech investor Cathie Wood is the lead stock-picker.
To be sure, the number one holding of the Autonomous Technology & Robotics ETF is Tesla (TSLA 1.43%) but you won’t find any other Magnificent Seven stocks in the top 10. The largest positions are mostly in smaller AI stocks, such as Teradyne (TER 0.71%), Kratos Defense & Security (KTOS +2.31%), and Archer Aviation (ACHR +1.85%).
The bottom line on ETFs
These three ETFs highlight several different components of my investment strategy and why I like to use ETFs so much. The first two are pure index plays — investments I hope to hold for decades that I think have a good entry point right now. On the other hand, the Ark ETF is on my radar because researching and analyzing smaller AI plays isn’t exactly in my wheelhouse, and this allows me to gain exposure to exciting investment opportunities without too much homework.
The bottom line is that regardless of your investment goals and comfort level with choosing individual stocks, ETFs can play a big role in your strategy. These are three that I think are particularly attractive as we head in 2026, and I plan to add shares of all three to my portfolio in the near future.
Matt Frankel, CFP has positions in Advanced Micro Devices, Amazon, Digital Realty Trust, Kratos Defense & Security Solutions, Prologis, Vanguard Real Estate ETF, and Vanguard Russell 2000 ETF. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Digital Realty Trust, Kratos Defense & Security Solutions, Prologis, Tesla, and Vanguard Real Estate ETF. The Motley Fool recommends Teradyne. The Motley Fool has a disclosure policy.