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

The consensus forecast among Wall Street analysts says the S&P 500 (^GSPC +1.15%) will reach 8,338 in the next year, according to FactSet Research. That implies 28% upside from its current level of 6,506.

However, analysts anticipate more upside in two stock market sectors:

• The consensus estimate says the information technology sector will reach 7,215 over the next year. That implies 39% upside from its current level of 5,203.
• The consensus estimate says the consumer discretionary sector will reach 2,244 over the next year. That implies 30% upside from its current level of 1,725.

Investors can get exposure to those stock market sectors by purchasing shares of the Vanguard Information Technology ETF (VGT +1.60%) and the Vanguard Consumer Discretionary ETF (VCR +2.46%). Here are the important details.

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1. Vanguard Information Technology ETF

The Vanguard Information Technology ETF measures the performance of 318 companies 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 are:

2. Nvidia: 18.1%
3. Apple: 15.8%
4. Microsoft: 10.4%
5. **Broadcom: **4.3%
6. Micron Technology: 2.4%

The Vanguard Information Technology ETF advanced 1,570% during the last two decades, which is equivalent to 15.1% annually. That is more than double the S&P 500’s total return of 636% (10.5% annually). Indeed, the information technology sector was the best-performing stock market sector during the last decade due to the proliferation of cloud computing and artificial intelligence (AI).

Risks to the information technology sector include cyclical revenue, especially in the semiconductor industry. Additionally, market sentiment surrounding artificial intelligence has been complicated lately. Investors are worried that hyperscalers are overspending on AI infrastructure, but they are also concerned that AI will disrupt the software industry.

Here’s my take: This Vanguard index fund provides easy exposure to many companies likely to benefit from AI, which may be the most transformative technology in decades. The fund is also cheap with an expense ratio of 0.09%. My only reservation is concentration risk. Three companies account for 44% of its performance. Investors comfortable with that risk should consider buying a small position today.

2. Vanguard Consumer Discretionary ETF

The Vanguard Consumer Discretionary ETF measures the performance of 286 companies in the consumer discretionary sector, which spans manufacturing and services. The index fund is most heavily exposed to companies in the broadline retail, automobile manufacturing, restaurant, hotel and cruise line, and home improvement industries.

The top five holdings are, as listed by weight:

2. Amazon: 23.4%
3. Tesla: 16.6%
4. Home Depot: 5.3%
5. McDonald’s 3.7%
6. TJX Companies: 2.7%

The Vanguard Consumer Discretionary ETF added 731% over the past two decades, which is equivalent to 11.1% annually. That beats the S&P 500’s total return of 636% (10.5% annually). Indeed, the consumer discretionary sector was the second best performing stock market sector during the past 20 years because of the proliferation of e-commerce.

Risk to the consumer discretionary sector include tariffs and rising gasoline prices, both of which could reduce consumer spending, which is the most consequential driver of economic growth. “The sector is highly exposed to economic conditions and thus vulnerable to a slowing economy and reduced consumer confidence and spending,” according to the Charles Schwab Center for Financial Research.

Here’s my take: This Vanguard index fund is likely to perform well during periods of strong economic growth. It is relatively cheap with an expense ratio of 0.09%, but it is also very concentrated. Three companies account for 45% of its performance. Investors comfortable with that risk should consider buying a small position today.

I would start with a small position because the economy is in a somewhat precarious spot right now. Tariffs have coincided with a slowdown in GDP and jobs growth, and rising oil prices could push the economy into a recession, according to Moody’s chief economist Mark Zandi. In that scenario, consumer discretionary stocks would probably fall more sharply than the broader S&P 500, as would technology stocks.