Prediction: This Brilliant ETF Will Crush the S&P 500 Over the Next 20 Years
Key Points
Vanguard sees U.S. value stocks and small-caps outperforming growth stocks and large-caps in the next decades.
If so, the Vanguard Morningstar Small-Cap Value ETF could be a better buy than other S&P 500 ETFs.
It has a 9.9% annualized return for the past 10 years and a dividend yield almost twice that of the S&P 500.
- 10 stocks we like better than Vanguard Morningstar Small-Cap Value ETF ›
One of the biggest questions facing the stock market right now is: Can the bull market continue? The S&P 500 index of the 500 largest publicly traded companies in America has been a great investment in recent years. The Vanguard S&P 500 ETF (NYSEMKT: VOO) has delivered annualized returns of about 15% for the past 16 years.
But can this winning streak for U.S. large-cap stocks keep going? Some investors worry that the S&P 500 has gotten too top-heavy with major tech stocks -- too much of a concentrated bet on the artificial intelligence (AI) boom, with not enough margin for error. Metrics like the Shiller CAPE ratio are also flashing ominous warning signs that today's S&P 500 might be overvalued and due for a downturn.
Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
No one knows for sure what will happen next. The S&P 500 might go into a short-term sell-off, suffer a serious crash and a long bear market...or keep growing strong for years to come. But Vanguard research suggests that large-cap stocks and growth stocks (like the ones that are such a big part of today's S&P 500) might not be the best investments for the next 20 years.
Let's look at Vanguard's latest forecast and see which exchange-traded fund (ETF) could be a better choice than the S&P 500 for the next 20 years.
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Vanguard research: Value stocks and small-caps are ready to outperform
Vanguard's most recent outlook for financial markets forecasts that U.S. value stocks and small-cap stocks will outperform U.S. growth stocks and large-caps for the next 10 years and 20 years. Here's how much stronger the returns could be for value stocks and small-caps based on Vanguard's model:
|
Type of stocks |
10-year annualized expected return |
30-year annualized expected return |
|---|---|---|
|
U.S. value stocks |
7.2% to 9.2% |
5.9% to 7.9% |
|
U.S. small-cap stocks |
5.6% to 7.6% |
5.4% to 7.4% |
|
U.S. large-cap stocks |
4.7% to 6.7% |
4.8% to 6.8% |
|
U.S. growth stocks |
4.2% to 6.2% |
4.4% to 6.4% |
Data source: Vanguard
Vanguard's research doesn't recommend any specific stocks or ETFs. One low-cost index fund that could fit this strategy is the Vanguard Morningstar Small-Cap Value ETF (NYSEMKT: VBR). This fund lets you own a diversified portfolio of smaller value companies. This could put your money to work in different parts of the economy than the possibly overpriced large-caps of the S&P 500.
834 stocks, 10 years of 9.9% annualized returns
The Vanguard Morningstar Small-Cap Value ETF holds 834 stocks that fit the bill for the types of investments that Vanguard forecasts will outperform in the next 10 to 30 years. VBR has returned 12.7% year to date, and is paying a 30-day SEC yield of 2.05%, which is almost twice the S&P 500 dividend yield of 1.04%.
This small-cap value fund has delivered annualized returns of about 9.9% for the past 10 years, 8.7% in the past five years, and 12.9% in the past year.
Why buy VBR instead of the S&P 500?
One good reason to buy VBR is if you believe small-caps and value stocks will outperform large-caps and growth stocks in the future. VBR is much less tech-heavy than the S&P 500. The top sector holdings in VBR are industrials (20.1% of the fund), financials (18.1%), consumer discretionary (14%), real estate (9.9%), and healthcare (9.3%).
This mix of sectors means that VBR might be less exposed to the AI trade (and a possible AI bubble). If you're worried about high valuations of tech stocks, or high levels of spending on AI data centers, this fund could put your money to work in different types of companies.
Should you buy stock in Vanguard Morningstar Small-Cap Value ETF right now?
Before you buy stock in Vanguard Morningstar Small-Cap Value ETF, consider this:
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Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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