Buy 2 Vanguard Index Funds to Beat the S&P 500 in the Next Year, According to Wall Street
Key Points
The consensus among Wall Street analysts says the healthcare and communication services sectors will beat the S&P 500 over the next year.
The Vanguard Health Care ETF underperformed the S&P 500 over the last decade, and its current valuation looks expensive.
The Vanguard Communication Services ETF underperformed the S&P 500 over the last decade, but its current valuation looks attractive.
- 10 stocks we like better than S&P 500 Index ›
Wall Street's median target price says the S&P 500 (SNPINDEX: ^GSPC) will increase to 8,698 over the next year. That implies 14% upside from its current level of 7,615. Meanwhile, analysts estimate the healthcare and communication services sectors will return 21% over the same period.
Investors who want direct exposure to those sectors should consider buying shares of the Vanguard Health Care ETF (NYSEMKT: VHT) and Vanguard Communications Services ETF (NYSEMKT: VOX). Here are the important details.
Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »
Image source: Getty Images.
1. Vanguard Health Care ETF
The Vanguard Health Care ETF tracks 405 U.S. companies in the healthcare sector that generally fall into two categories: (1) companies that make healthcare equipment or provide healthcare services, and (2) companies involved in pharmaceutical and biotechnology research. The five largest holdings are as follows:
- Eli Lilly: 12.1%.
- Johnson & Johnson: 8.8%.
- AbbVie: 6%.
- UnitedHealth Group: 5.4%.
- Merck: 4.3%.
The Vanguard Health Care ETF has a low expense ratio of 0.09%. However, the index fund returned 148% (9.5% annually) over the past decade. Meanwhile, the broader S&P 500 returned 329% (15.6% annually).
Looking ahead, Wall Street estimates healthcare sector earnings will increase 3% in 2026, the slowest growth of any stock market sector. Analysts expect earnings growth to accelerate to 19% in 2027, but the current valuation of 27 times earnings still looks expensive.
The pharmaceutical industry, which accounts for one-third of the Vanguard Health Care ETF, is dealing with a major problem. In the next four years, nearly 200 drugs, including 69 that generate at least $1 billion in annual sales, will lose patents. That so-called "patent cliff" paints a bleak financial picture for the years ahead.
Here's the bottom line: Wall Street says the healthcare sector will outperform the broader S&P 500 over the next year. But I am skeptical because of historical underperformance, high valuations, and headwinds in the pharmaceutical industry. For those reasons, I'd rather own an S&P 500 index fund.
2. Vanguard Communication Services ETF
The Vanguard Communication Services ETF tracks 114 stocks in the communications services sector. The index fund is most heavily weighted toward three industries: telecommunications, interactive media, and entertainment. The five largest holdings are as follows:
- Alphabet: 26.9%.
- Meta Platforms: 20.3%.
- Netflix: 5.1%.
- Verizon Communications: 4.1%.
- Walt Disney: 4%.
The Vanguard Communication Services ETF has a low expense ratio of 0.09%. But the index fund returned 152% (9.6% annually) over the past decade. Meanwhile, the broader S&P 500 returned 329% (15.6% annually).
Looking ahead, Wall Street estimates that communication services sector earnings will grow 28% in 2026. That makes the current valuation of 20 times earnings look attractive. More importantly, the sector could maintain strong earnings growth for years to come as companies such as Alphabet and Meta Platforms benefit from advancements in artificial intelligence.
Here's the bottom line: Wall Street expects the communication services sector to beat the S&P 500 over the next year. That is certainly plausible. Investors who agree should consider purchasing shares of the Vanguard Communication Services ETF. But I would still keep a larger portion of my portfolio in an S&P 500 index fund.
Why? The S&P 500 crushed the communication services sector during the past decade, and the same thing could happen in the years ahead because technology stocks, which make up about 40% of the S&P 500, will probably be the biggest winners as the artificial intelligence revolution unfolds.
Should you buy stock in S&P 500 Index right now?
Before you buy stock in S&P 500 Index, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and S&P 500 Index wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $462,983!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,375,447!*
Now, it’s worth noting Stock Advisor’s total average return is 995% — a market-crushing outperformance compared to 212% for the S&P 500. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
See the 10 stocks »
*Stock Advisor returns as of June 3, 2026.
Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie, Alphabet, Eli Lilly, Merck, Meta Platforms, Netflix, and Walt Disney. The Motley Fool recommends Johnson & Johnson, UnitedHealth Group, and Verizon Communications. The Motley Fool has a disclosure policy.
Recommended Articles
