The S&P/ASX 200 Index (ASX: XJO) has been a solid long-term performer, and if it delivers something like a 9% return in 2026, that would be a very respectable outcome for investors.
But when I look beyond Australia, I see parts of the global market that I think have a genuine chance to do much better than that.
One exchange traded fund (ETF) from Vanguard in particular stands out to me as having the right mix of growth potential, diversification, and valuation support to meaningfully outperform the ASX 200 this year.
That ETF is the Vanguard MSCI International Small Companies Index ETF (ASX: VISM).
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Why I think international small caps could shine in 2026
VISM ETF provides exposure to more than 3,600 small cap stocks across developed markets outside Australia. These are businesses listed in countries like the United States, Japan, the United Kingdom, and Canada.
Small-cap shares tend to be more volatile than large caps, but that volatility is often the price investors pay for higher long-term growth. Smaller companies are typically earlier in their expansion cycle, which gives them more scope to grow earnings faster than established blue chips.
What I find compelling in 2026 is that many international small caps are coming from a relatively subdued period of performance. In contrast, large-cap indices have already enjoyed strong runs in recent years. That sets up a potential environment where leadership broadens beyond the biggest names.
Valuation and growth look well balanced
One of the reasons I am comfortable making a bullish call on the VISM ETF is that its underlying valuation does not look stretched.
According to Vanguard, the ETF is trading on a price-to-earnings ratio of around 17.9 times, which I think is reasonable given its forecast earnings growth rate of roughly 12.5%. Return on equity sits at about 9.3%, and while the dividend yield is modest at 1.85%, this fund is clearly designed for growth rather than income.
In other words, investors are not paying extreme multiples for speculative growth. They are getting exposure to thousands of profitable businesses with genuine earnings momentum.
Diversification the ASX simply cannot match
Another reason I believe the Vanguard MSCI International Small Companies Index ETF could outperform the ASX 200 is diversification.
The Australian share market is heavily skewed toward banks, miners, and a handful of large industrials. By contrast, this Vanguard ETF spreads its exposure across thousands of companies, multiple sectors, and more than 20 developed economies.
The United States makes up about 63% of the portfolio, followed by Japan at 13%, with meaningful exposure to Europe and Canada as well. Sector exposure is broad, with holdings spanning technology, healthcare, industrials, consumer businesses, and energy.
No single stock dominates the portfolio. The largest holding, SanDisk Corp (NASDAQ: SNDK), represents well under half a percent of net assets. That structure reduces company-specific risk while still allowing investors to benefit from overall small-cap growth.
Why I think this Vanguard ETF can beat the ASX 200 index
If the ASX 200 delivers a 9% return in 2026, I think the VISM ETF has a realistic chance to exceed that by a meaningful margin.
Faster earnings growth, broader diversification, reasonable valuations, and exposure to international economic expansion all work in its favour. It will not outperform every year, and there will be volatility along the way. But on a forward-looking basis, the setup looks attractive to me.
For investors willing to accept higher short-term swings in pursuit of stronger long-term returns, I think Vanguard MSCI International Small Companies Index ETF is well placed to outperform.
