2 Vanguard Index Funds to Buy to Beat the S&P 500 in the Next Year, According to Wall Street
Key Points
Most Wall Street analysts expect the technology and industrials sectors to beat the S&P 500 over the next year.
The Vanguard Information Technology ETF offers exposure to technology stocks like Nvidia, Apple, and Microsoft.
The Vanguard Industrials ETF provides exposure to industrial stocks like Caterpillar, GE Aerospace, and RTX.
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Wall Street's consensus forecast says the S&P 500 (SNPINDEX:^GSPC) will advance 22% to 9,252 by September 2027, according to FactSet Research. However, analysts expect more substantial gains in the technology and industrials sectors, which are forecast to return 28% and 26%, respectively, over the same period.
Investors can get direct exposure to those market sectors with the Vanguard Information Technology ETF (NYSEMKT:VGT) and the Vanguard Industrials ETF (NYSEMKT:VIS). Read on to learn more about these index funds.
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1. Vanguard Information Technology ETF
The Vanguard Information Technology ETF measures the performance of 319 stocks in the information technology sector, which includes three major segments: software and cloud services, technology hardware and equipment, and semiconductors and semiconductor manufacturing equipment.
The Vanguard ETF has a relatively cheap expense ratio of 0.09%, which means investors will pay $9 annually on every $10,000 invested in the fund. The five largest holdings are listed by weight below:
- Nvidia: 17.7%
- Apple: 15.8%
- Microsoft: 11.5%
- Broadcom: 4.5%
- Micron Technology: 4.2%
The Vanguard Information Technology ETF returned 787% (24.4% annually) during the last 10 years. Meanwhile, the S&P 500 added 323% (15.5% annually) over the same period. The technology sector outperformed over the last decade due to widespread adoption of cloud computing and (more recently) artificial intelligence.
That outperformance could continue in the years ahead as AI adoption drives another wave of spending on cloud infrastructure and software services. The Vanguard Information Technology ETF currently trades at 22 times forward earnings, a relatively cheap valuation when sector-level earnings are forecast to grow at 42% annually through 2027, according to FactSet Research.
Here's the big picture: This Vanguard index fund is a reasonable option for investors seeking greater exposure to the technology sector. However, prospective buyers should understand the concentration risk. The fund is heavily weighted toward three stocks, so any weakness in Nvidia, Apple, and Microsoft could be a material drag on its overall performance.
2. Vanguard Industrials ETF
The Vanguard Industrials ETF measures the performance of 397 stocks in the industrials sector, which includes companies whose businesses are focused on the manufacturing and distribution of capital goods, the provision of commercial services and supplies, and the provision of transportation services.
The Vanguard Industrials ETF is most heavily weighted toward the aerospace and defense industry, but it also offers heavy exposure to companies that supply electrical equipment and construction machinery. The fund has an expense ratio of 0.09%. The five largest holdings are listed by weight below:
- Caterpillar: 5.3%
- GE Aerospace: 5%
- RTX: 4%
- GE Vernova: 3.5%
- Deere & Company: 2.3%
The Vanguard Industrials ETF achieved a total return of 250% (13.3% annually) over the last decade, while the S&P 500 added 323% (15.5% annually) over the same period. Underperformance in the industrials sector was driven by supply chain disruptions, as well as inflation and high interest rates that pressured capital-intensive businesses.
However, industrials stocks could beat the S&P 500 in the years ahead as demand for AI infrastructure drives spending on power-generation equipment, electrical components, and construction services. The Vanguard Industrials ETF currently trades at 25 times forward earnings, which is somewhat expensive when earnings are forecast to grow at 14% annually through 2027.
Here's the big picture: This Vanguard index fund is a good option for investors seeking more exposure to the industrials sector. But prospective shareholders should bear in mind that industrial stocks underperformed over the last decade and the fund is not cheap at its current price. For those reasons, I would rather own an S&P 500 index fund.
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Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Apple, Broadcom, Caterpillar, Deere & Company, FactSet Research Systems, GE Aerospace, GE Vernova, Micron Technology, Microsoft, Nvidia, and RTX. The Motley Fool has a disclosure policy.
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