Recent analyses by Wall Street analysts suggest that investing in specific Vanguard index funds may provide opportunities to outperform the S&P 500. The forecasts indicate that the S&P 500 could return 39% over the next five years. In contrast, the S&P Mid-Cap 400 and the S&P Small-Cap 600 are projected to deliver slightly higher returns of 41% and 42%, respectively.
Vanguard S&P Mid-Cap 400 ETF
The Vanguard S&P Mid-Cap 400 ETF focuses on 400 mid-cap stocks, defined as companies with market values between $8 billion and $22.7 billion. This fund incorporates both value and growth stocks across various sectors, with significant allocations to the following:
- Industrials: 24%
- Financials: 15%
- Technology: 14%
The fund’s top holdings include:
- Ciena: 1%
- Coherent: 0.9%
- Lumentum: 0.8%
- Curtiss-Wright: 0.7%
- Flex: 0.7%
Over the past 15 years, the Vanguard S&P Mid-Cap 400 ETF returned 365%, averaging an annual return of 10.8%. Meanwhile, the S&P 500 returned 591% or 13.7% annually during the same timeframe. The underperformance of the mid-cap fund can be partly attributed to its lower exposure to the technology sector, which has shown robust growth.
Expense Ratio
This ETF carries an expense ratio of 0.07%, which translates to an annual cost of $7 for every $10,000 invested. While it offers exposure to mid-cap stocks, there may be challenges in outperforming the S&P 500 in the near future.
Vanguard S&P Small-Cap 600 ETF
The Vanguard S&P Small-Cap 600 ETF tracks 600 small-cap stocks, categorized as companies with market values from $1.2 billion to $8 billion. It similarly includes both value and growth stocks, primarily concentrated in the following sectors:
- Financials: 18%
- Industrials: 18%
- Consumer discretionary: 13%
The leading holdings are:
- Solstice Advanced Materials: 0.6%
- Arrowhead Pharmaceuticals: 0.6%
- Moog: 0.5%
- LKQ: 0.5%
- InterDigital: 0.5%
This fund also yielded a 360% return over the past 15 years, averaging 10.7% annually. Although it underperformed the S&P 500 significantly, it surpassed the Russell 2000 by 60 percentage points due to its more rigorous eligibility criteria.
Expense Ratio
The Vanguard S&P Small-Cap 600 ETF maintains an expense ratio of 0.07%. It presents a solid option for investors interested in small-cap exposure, though its ability to outperform the S&P 500 remains uncertain.
Investment Considerations
The debate surrounding these index funds typically centers on their long-term sustainability. Small-cap and mid-cap index funds often face disadvantages since stocks that succeed are removed once they exceed market value thresholds, while underperformers remain. This dynamic can hinder overall portfolio growth.
Famed investor Peter Lynch once noted that holding onto losers while selling winners is detrimental to investment success. Alternatively, the S&P 500 aggregates top performers, continually adjusted to reflect the most influential U.S. companies. This framework can offer investors a more advantageous route compared to mid-cap or small-cap investments.
In summary, while Vanguard’s S&P Mid-Cap 400 and Small-Cap 600 ETFs present viable investment opportunities, analysts lean towards the S&P 500 for potentially greater returns in the coming years.
