Two Vanguard Index Funds to Consider for Potential Outperformance
Wall Street analysts believe the S&P 500 may deliver lower returns in the coming years than it has during its recent seven-year burst. Morgan Stanley’s team, led by Lisa Shalett, projects a 6.3% annual return for the S&P 500 over the next seven years, a far cry from the roughly 15% annual gain investors enjoyed in the recent past. With this outlook, many investors are looking for low-cost index options that offer broad exposure and potential for better risk-adjusted outcomes. Here are two Vanguard index funds that analysts often point to as sensible ways to diversify and position portfolios for potential outperformance relative to a pure S&P 500 tilt.
1) Vanguard Total World Stock ETF (VT)
What it is: VT is a broadly diversified all‑world equity fund that tracks a composite of developed and emerging markets. It provides exposure to thousands of stocks across the globe, including the United States.
Why it could outperform the S&P 500 over time: A globally balanced equity approach captures growth opportunities outside the U.S. and can smoothen earnings volatility across regions. When the U.S. market has a strong run, international markets often face a different cycle, so a fund like VT can benefit from diversification across economies and currencies. In a world where inflation and monetary policy diverge across regions, broad exposure helps manage concentration risk inherent in any single market index.
Considerations for investors: VT’s broad scope means its performance is tied to global equity markets, which can underperform the U.S. during certain periods. The fund carries currency exposure, which can both help and hurt returns depending on exchange rate movements. For long-horizon investors seeking simplicity and broad diversification, VT offers a compelling way to participate in global equity growth without selecting individual countries or sectors.
2) Vanguard Total Stock Market ETF (VTI)
What it is: VTI aims to track the performance of the entire U.S. stock market, including large-, mid-, small-, and micro-cap stocks. It’s effectively a one-stop proxy for the U.S. equity landscape.
Why it could outperform the S&P 500 over time: While VTI includes the S&P 500 portion, it also adds mid- and small-cap exposures that can drive higher long-run growth. Historically, small- and mid-cap stocks have contributed to superior long-term returns during favorable growth phases. With a long time horizon, the blended exposure to the broader market can capture upside that a pure S&P 500 sleeve might miss.
Considerations for investors: The extra small- and mid-cap exposure can also introduce more volatility than a pure large-cap S&P 500 index. For investors who can tolerate periodic pullbacks and want a simple, low-cost U.S. core holding, VTI is a tried-and-true choice that aligns closely with U.S. market fundamentals.
How to incorporate these funds into a portfolio
Investors looking to beat the S&P 500 over the long run often embrace diversified core holdings. A practical approach is to allocate a primary core position to a broad U.S. exposure like VTI to anchor performance and to complement it with VT for global diversification. For example, an initial 60/40 or 70/30 split between U.S.-focused and global equities can help manage risk while still participating in equity upside across regions.
As with any investment, it’s essential to align choices with your time horizon, risk tolerance, and financial goals. The anticipated seven-year horizon used by some analysts provides a useful frame, but market conditions can change. Regular portfolio reviews and rebalancing help ensure your allocations stay aligned with your targets.
Bottom line
Two Vanguard index funds—VT for global diversification and VTI for broad U.S. exposure—offer a simple, cost-effective path to potentially outperform the S&P 500 over the coming years through diversified growth, less concentration risk, and long-run compounding. Always couple index choices with a broader financial plan and consider speaking with a financial advisor to tailor a strategy to your needs.
