Beyond Market Cap: Why Fundamental ETFs Are Winning in 2026

Market-cap weighting works really well when megacap tech stocks continue to set new highs. However, in 2026 there have been cracks in traditional benchmarks. Investors are focusing more on companies that are profitably growing, making ETFs tied to the the concentrated Russell 1000 indices less appealing. Meanwhile, ETFs that screen for fundamental strength are generating alpha.Key Takeaways The Invesco RAFI US 1000 ETF (PRF A-) rose 21% year-to-date through October 2026, nearly double the 11% return of the cap-weighted iShares Russell 1000 ETF (IWB A). While the iShares Russell 1000 Growth ETF (IWF B+) was fractionally lower in the first 10 months of 2026, the VictoryShares Free Cash Flow Growth ETF (GFLW ) climbed 12%. Choosing companies based on fundamental metrics such as cash flow, dividends, or sales allows for investment based on a forward rather than backward approach. Core Equities: RAFI Fundamental Discipline (PRF vs. IWB)In broad core allocations, standard market-cap index ETFs like IWB force soaring equity valuations to drive portfolio concentration. By contrast, PRF tracks an index of 1,000 of the largest U.S. companies selected and weighted by four fundamental measures of company size: adjusted sales, cash flow, dividends plus buybacks, and book value plus intangibles. Holdings and Breadth: IWB concentrates 34% of its assets in its top 10 names and is heavily tilted toward mega-cap tech like Apple (APPL) (7.0% of assets) and Microsoft (MSFT) (5.4%). In contrast, PRF’s top 10 allocation is a more diversified 23%. While PRF owns Apple and Microsoft, the weights are lower. Meanwhile, high quality non-tech companies like ExxonMobil (XOM) (2.1%), Berkshire Hathaway (BRK.B) (1.9%), and JPMorgan Chase (JPM) (1.6%) represent more of PRF’s portfolio. Performance Impact: PRF’s systematic rebalancing helped generate a 21% total return year-to-date through October. This significantly outpaced IWB’s 11% gain. Growth Equities: Free Cash Flow Reality (GFLW vs. IWF)The fundamental edge is even starker in growth, where market-cap benchmarks have been vulnerable to a valuation reset in 2026. The iShares Russell 1000 Growth ETF (IWF) is built based on price momentum, led by an outsized 15% position in Nvidia (NVDA) alone. Conversely, the VictoryShares Free Cash Flow Growth ETF (GFLW ) screens large-cap growth companies for high free cash flow profitability and strong growth prospects: Balanced Allocation: Rather than letting tech giants dictate returns, GFLW caps individual exposures. As a result, the ETF has relatively high exposure to quality companies across other sectors like health care and industrials. Positions include Eli Lilly (LLY) (4.8% of assets), Nvidia (3.3%), Cardinal Health (CAH) (3.0%), Royalty Pharma (RPRX) (3.0%), and Caterpillar (CAT) (2.7%). Resilient Returns: GFLW’s fundamental discipline insulated investors from tech drawdowns. Year-to-date through October, GFLW rose 12% compared to a 0.3% loss for IWD. The Bottom Line for AllocatorsCap-weighted indexing leaves portfolios exposed to narrow market leadership and abrupt reversals. By implementing a fundamental approach, advisors or investors can maintain equity exposure with diversification benefits. At the end of October, factor ETF net inflows were approximately $80 billion this year, according to State Street Investment Management. This is the largest annual total since 2022’s $100 billion. Victory Capital will be joining VettaFi at the 2027 Market Outlook Symposium on November 12 to discuss free cash flow investing. Register and learn.2026 Year-to-Date Total Return PerformanceFor more news, information, and strategy, visit the Smart Beta Content Hub. VettaFi LLC (“VettaFi”) is the index provider for GFLW and PRF, for which it receives an index licensing fee. However, GFLW and PRF are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of GFLW and PRF.