2 Vanguard ETFs to Buy to Outperform the S&P 500 Over the Next Decade, According to Analysts

Despite some ups and downs to start the year, the S&P 500 (^GSPC +0.84%) has climbed about 6% in 2026 so far as of this writing. But looking under the hood reveals a much wider range of outcomes across various market sectors. Energy stocks have boomed while financial stocks have struggled, for example. Beyond the large-cap index, small-cap stocks have zoomed higher.

The disparate performance of various sectors is a testament to the power of index investing. But underweighting overvalued market segments and overweighting undervalued segments could ultimately yield returns better than investing entirely in an S&P 500 index fund. The analysts at Vanguard updated their Capital Markets Model to identify market opportunities. Their long-term forecast suggests two market segments could outperform the S&P 500 over the next decade, and it offers two exchange-traded funds (ETFs) to buy to take advantage.

Finding opportunities in today’s market

The Vanguard Capital Markets Model uses historic data and current valuations to project long-term returns for equities, bonds, and other asset classes. Updated quarterly, it can serve as an excellent starting point for identifying undervalued market segments. The analysts warn, however, that short-term returns can vary wildly from the model’s long-term projections.

That wasn’t exactly the case in the first quarter. At the start of the year, the model showed that value stocks and small-cap stocks were undervalued. Both groups outperformed the S&P 500 through the first three months of the year.

When the analysts updated their model, it still showed that both small-cap and value stocks were undervalued relative to the rest of the market, despite their strong performances. Indeed, when the model sees a long-term opportunity, it’ll likely take more than one good quarter for it to play out.

After the update, the model now projects 10-year annualized returns of 6.9% and 6.8% for value stocks and small-cap stocks, respectively. That’s well above the expected annualized returns for the total U.S. equity market (5.9%) and large-cap stocks (5.8%).

That points to the massive discrepancy in valuations between value and growth stocks, and between small- and large-cap stocks.

The relative forward P/E ratio of the S&P 500 Pure Growth index to the S&P 500 Pure Value index sits above 2. That’s a level it’s consistently traded around since 2024, and well above the historical average of around 1.5 seen in the 2010s.

Likewise, the relative forward P/E ratios for the large-cap S&P 500 and the small-cap S&P 600 is still relatively high at 1.3. While that’s down from the 1.4 level at the start of the year, it’s still well above the historic average. It’s worth noting that the S&P 500 traded at a lower P/E ratio than the S&P 600 for almost all of the 2010s, but that trend has reversed since 2020.

The Vanguard model expects those trends to revert to the mean, and investors interested in capitalizing on that potential can buy two different Vanguard funds to take advantage.

The Vanguard ETFs to buy

Index investors can easily tilt their portfolios toward small-cap and value stocks by adding two Vanguard ETFs to their portfolios, even if they maintain the bulk of their investments in something like a total stock market index fund.

The first ETF, the Vanguard Value ETF (VTV +0.55%), tracks the CRSP U.S. Large Cap Value Index. The index filters stocks by valuation metrics, selecting the cheaper half of the broader large-cap index. The result is a relatively diverse portfolio of value stocks with limited turnover. The index is overweight in financials, industrials, and healthcare, while underweight in technology.

The simplistic valuation filter leaves the index susceptible to value traps, but market-cap weighting typically mitigates the impact of those stocks on the overall index returns. Keeping things simple also ensures lower turnover and a low expense ratio, which is just 0.03% of invested assets.

The second ETF is the Vanguard Small-Cap ETF (VB +0.56%). It tracks the broad-based CRSP U.S. Small Cap Index, which holds over 1,300 stocks. The cap-weighted index ensures that stocks that appreciate in value grow to become a larger portion of the portfolio, while reducing turnover. It also has an expense ratio of just 0.03%.

Despite the strong starts both funds have made in 2026, they still have significant long-term potential for investors looking to capitalize on relative valuation discrepancies.