2 Vanguard ETFs to Buy Now to Outperform the S&P 500, According to Wall Street Analysts

Even after an incredible bull market run for the last 45 months, analysts still expect the S&P 500 index to keep climbing through 2026 and beyond. One of the biggest drivers of the current cycle has been artificial intelligence (AI), and analysts expect AI stocks to continue delivering phenomenal results for at least the next year, if not longer. A natural fit for most AI stocks is the tech sector, but a couple of other sectors could perform even better, based on analysts' estimates.

Investors looking to outperform could buy simple, low-cost exchange-traded funds (ETFs) from Vanguard, concentrating their portfolios in sectors most likely to outperform, according to Wall Street. Here are two to buy -- and what investors need to know about each.

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1. The Vanguard Communication Services ETF

Communication and media companies are expected to produce better returns for investors over the next 12 months than any other sector. The bottom-up price target for the sector, which aggregates individual stock price targets from each component of the sector index, was 32.4% higher than its level as of the end of June, according to data from FactSet Insight. The Vanguard Communication Services ETF (NYSEMKT: VOX) provides exposure to the sector with an expense ratio of just 0.09%, making it an effective way to invest in top communications companies.

When investors think of communication and media companies, they probably think of the top telecom and broadcast networks in the U.S. Sure enough, they have significant representation in the top 10 holdings of the fund. But two companies completely dominate the ETF, and that might surprise investors: Meta Platforms and Alphabet. Here are the top 10 holdings in the Vanguard fund:

1. Meta Platforms
2. Alphabet (Class A)
3. Alphabet (Class C)
4. Verizon
5. Disney
6. AT&T
7. Netflix
8. Comcast
9. T-Mobile
10. Warner Bros. Discovery

Meta and Alphabet account for roughly 44% of the portfolio. The two companies were reclassified from technology to communications stocks in 2018 when the sector was expanded and overhauled to include media companies as well. It makes sense, too. In the age of digital communications, Meta and Alphabet play extremely important roles.

However, that means the Vanguard Communication Services ETF is still very much an AI play. Meta and Alphabet are investing tens of billions of dollars every year to build computing capacity and develop leading-edge large language models. They also use their models in their own products, improving their advertising platforms.

Both are seeing strong momentum in their core digital advertising businesses. Alphabet's cloud platform is seeing solid revenue acceleration, and Meta could start selling access to its data centers in the future, providing a significant ancillary revenue source. While there are many great stocks in the ETF, investors should understand that the concentration in two companies is driving analysts' sector expectations.

2. The Vanguard Consumer Discretionary ETF

The consumer discretionary sector is full of companies that benefit when people are in a spending mood: retailers, travel companies, and automakers, among others. Despite consumer sentiment currently sitting near historical lows and inflation continuously weighing on spending power, analysts still expect strong results from the sector.

Investors can buy the Vanguard Consumer Discretionary ETF (NYSEMKT: VCR) to add the sector to their portfolio. It also charges just 0.09% of assets under management, making it one of the most cost-effective ways to add exposure to a segment poised to outperform, according to analysts.

Again, the index is concentrated in its top two holdings, but it contains several fantastic stocks to round out the top 10.

1. Amazon
2. Tesla
3. Home Depot
4. McDonald's
5. TJX Companies
6. Booking Holdings
7. Lowe's
8. Starbucks
9. Marriott
10. General Motors

Amazon and Tesla combine to account for nearly 40% of the fund -- AI is inescapable, since both companies present different ways to invest in the tech trend.

Amazon is the largest online retailer in the world, putting it firmly in the consumer discretionary sector. However, it's also the leading cloud computing company, and that's currently driving the stock price. Management is investing about $200 billion this year in building new data centers to serve its customers, and it holds a backlog of contracted revenue to support that huge construction. That should ensure it produces a strong return on its invested capital over the long run.

Tesla is investing heavily in developing AI for its robotaxi and humanoid robotics plans. An AI breakthrough in autonomous vehicles could allow it to scale up a robotaxi business extremely quickly, enabling existing Tesla vehicle owners to put their cars into the fleet. The potential for humanoid robots to replace human labor in some sectors could drive significant revenue potential. These are big bets, however, and there's significant risk in investing in the company.

If consumer sentiment improves, it could reduce the concentration of Amazon and Tesla in the ETF, but for now, the two are driving sector expectations.

Adam Levy has positions in Alphabet, Amazon, Booking Holdings, Meta Platforms, Netflix, and Walt Disney. The Motley Fool has positions in and recommends Alphabet, Amazon, Booking Holdings, Home Depot, Meta Platforms, Netflix, Starbucks, TJX Companies, Tesla, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends Comcast, General Motors, Lowe's Companies, Marriott International, T-Mobile US, and Verizon Communications and recommends the following options: long January 2028 $320 calls on McDonald's and short January 2028 $340 calls on McDonald's. The Motley Fool has a disclosure policy.