We discovered that Enterococcus faecium (E. faecium), a ubiquitous commensal bacterium, and its secreted peptidoglycan hydrolase (SagA) were sufficient to enhance intestinal barrier function and pathogen tolerance, but the precise biochemical mechanism was unknown. Here we show E. faecium has unique peptidoglycan composition and remodeling activity through SagA, which generates smaller muropeptides that more effectively activates nucleotide-binding oligomerization domain-containing protein 2 (NOD2) in mammalian cells. Our structural and biochemical studies show that SagA is a NlpC/p60-endopeptidase that preferentially hydrolyzes crosslinked Lys-type peptidoglycan fragments. SagA secretion and NlpC/p60-endopeptidase activity was required for enhancing probiotic bacteria activity against Clostridium difficile pathogenesis in vivo. Our results demonstrate that the peptidoglycan composition and hydrolase activity of specific microbiota species can activate host immune pathways and enhance tolerance to pathogens.