This Vanguard ETF Has a History of Outperforming the S&P 500 During Bear Markets. Is It a Buy Right Now?

The S&P 500 has generated an average annual return of about 10% since its inception in 1957. Since most funds underperform that index over the long term, Vanguard's founder, John Bogle, once told investors, "Don't look for the needle in the haystack. Just buy the haystack."

To simplify that process, Vanguard launched its first S&P 500 index fund, the Vanguard S&P 500 Index Fund (NASDAQMUTFUND: VFINX), in 1976. In 2000, it introduced the Vanguard S&P 500 ETF (NYSEMKT: VOO), which could be actively traded throughout the day. Both low-cost funds have delivered reliable, market-tracking gains for their long-term investors.

But in 2004, it launched the Vanguard Consumer Staples ETF (NYSEMKT: VDC), which outperformed the S&P 500 from 2007 to 2009 and throughout 2022. Let's see why this defensive ETF beat the market -- and if it's a better long-term buy than VOO.

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What does the Vanguard Consumer Staples ETF own?

VDC passively tracks the MSCI US IMI Consumer Staples 25/50 index, which comprises 104 small-cap, mid-cap, and large-cap stocks across the consumer staples sector.

However, it's a market-cap-weighted index with a median market cap of $257.3 billion, so its largest holdings are all large-cap companies. Its top holdings are Walmart (16.2% of its portfolio), Costco (12.3%), Procter & Gamble (9.1%), Coca-Cola (8.4%), and PepsiCo (4.5%).

Its underlying index focuses on companies that provide non-discretionary goods -- such as food, beverages, household items, personal care products, and tobacco -- that people continue to buy during recessions. That's why it outperformed the S&P 500 -- which includes a much broader range of companies -- during the Great Recession and the 2022 interest rate shock.

But is VDC a better long-term investment than VOO?

VDC is a good defensive play during bear markets, but it's underperformed VOO over the long term because bull markets drive investors away from defensive stocks. Over the past 10 years, VDC's price has risen only 20% -- while VOO's price has surged about 80%. VOO's expense ratio of 0.03% is also significantly lower than VDC's 0.09%.

If you're not planning to hold your core stocks for at least a few years and expect a market crash in the near future, VDC might be a compelling investment. But if you're a long-term investor, it doesn't make much sense to allocate too much of your portfolio to VDC. It's a good defensive hedge against the next market crash, but it's not built to beat the market in the long run.

Leo Sun has positions in Coca-Cola. The Motley Fool has positions in and recommends Costco Wholesale, Vanguard S&P 500 ETF, and Walmart. The Motley Fool has a disclosure policy.