2 Vanguard Index Funds to Buy Now to Beat the S&P 500 in the Next Year, According to Wall Street

Wall Street's consensus forecast says the S&P 500 (SNPINDEX:^GSPC) will advance 27% in the next year, but analysts expect greater returns in two market sectors: information technology (44%) and communication services (35%), according to FactSet Research.

That means investors can potentially beat the benchmark S&P 500 by owning two index funds: the Vanguard Information Technology ETF (NYSEMKT:VGT) and the Vanguard Communication Services ETF (NYSEMKT:VOX).

Read on to learn about these index funds.

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1. The Vanguard Information Technology ETF

The Vanguard Information Technology ETF measures the performance of 318 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 top five holdings in the index fund are listed by weight below:

1. Nvidia: 17.6%
2. Apple: 15.9%
3. Microsoft: 11.1
4. Micron Technology: 4.5%
5. Broadcom: 4.1%

The Vanguard Information Technology ETF gained 1,900% (15.1% annually) in the last two decades, more than doubling the S&P 500, which returned 677% (10.8% annually). Stocks in the technology sector outperformed due to the proliferation of cloud computing and, more recently, artificial intelligence.

One risk associated with an index fund that tracks the technology sector is high concentration within the cyclical semiconductor industry. Demand for chips tends to fluctuate sharply over time, causing earnings growth to fluctuate among chipmakers. That can lead to enormous stock price volatility.

Additionally, market sentiment surrounding AI has been complicated by anxiety about how much money hyperscalers are investing in data center infrastructure. Investors are worried those companies will never see a satisfactory return on investment.

Personally, I think those fears are overblown, especially regarding the transformative nature of artificial intelligence. The Vanguard Information Technology ETF is a compelling way for investors underexposed to AI stocks to get exposure to the revolutionary technology, and the expense ratio is modest at 0.09%.

My biggest reservation is concentration. More than 50% of the fund is invested in five stocks, which means any volatility in those stocks would have a disproportionately large impact on the fund. Investors comfortable with that risk should consider buying a small position right now, provided they are not overexposed to the technology sector already.

2. Vanguard Communication Services ETF

The Vanguard Communication Services ETF measures the performance of 111 stocks in the communications services sector. The index fund is most heavily weighted toward three industries: telecommunications, interactive media, and entertainment.

The top five holdings in the index fund are listed by weight below:

1. Meta Platforms: 25.3%
2. Alphabet: 21.7%
3. Walt Disney: 4.2%
4. Verizon Communications: 4%
5. AT&T: 4%

The Vanguard Communication Services ETF added 290% (7.1% annually) during the last two decades, falling short of the broader S&P 500, which added 677% (10.8% annually) over that period. Yet, communication stocks look reasonably attractive today.

Wall Street expects communication services sector earnings to increase at 19% annually through 2027, which makes the current valuation of 15.5 times earnings look reasonable, if not cheap. That is especially true when the two largest holdings -- Meta Platforms and Alphabet -- are well positioned to benefit from the AI boom.

The Vanguard Communication Services ETF is a good way for investors underexposed to the communication services sector to diversify their portfolios, especially given its modest expense ratio of 0.09%. However, this fund carries even greater concentration risk than the information technology fund discussed in the previous section.

To that end, I would keep a much larger portion of my portfolio in an S&P 500 index fund (as opposed to a sector-specific fund). The S&P 500 is far more diversified, and picking which sectors will outperform in the future is hard. In fact, information technology was the only sector to beat the broader S&P 500 over the last decade.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, FactSet Research Systems, Meta Platforms, and Walt Disney. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.