Buy 2 Vanguard Index Funds To Beat IS&P 500 Over Next 5 Years, According To Wall Street Analysts

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Buy 2 Vanguard Index Funds To Beat IS&P 500 Over Next 5 Years, According To Wall Street Analysts

State Street Investment Management recently updated its outlook for global stocks. In the next five years, the S&P 500 (SNPINDEX: ^GSPC) forecast to return 39%, while S&P Mid-Cap 400 again S&P Small-Cap 600 41% and 42% are expected to return, respectively.

Investors can gain exposure to those indices by purchasing shares of Vanguard S&P Mid-Cap 400 ETF (NYSEMKT: IVOO) as well as Vanguard S&P Small-Cap 600 ETF (NYSEMKT: VIOO). Here are the important details.

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The Vanguard S&P Mid-Cap 400 ETF measures the performance of 400 mid-cap stocks, defined as companies with market values between $8 billion and $22.7 billion. The fund has value stocks and growth stocks from all sectors, but is heavily weighted in three market sectors: industrials (24%), financials (15%), and technology (14%).

The top five points are listed below:

Ciena: 1%
Compatibility: 0.9%
Lumentum: 0.8%
Curtis-Wright: 0.7%
Flex: 0.7%

The Vanguard S&P Mid-Cap 400 ETF has returned 365% (10.8% annually) over the past 15 years, while the S&P 500 has returned 591% (13.7% annually) over the same period. Another reason why the average fund underperforms is because of the relative exposure associated with the technology sector, which always delivers strong results.

The Vanguard S&P Mid-Cap 400 ETF has an expense ratio of 0.07%, meaning shareholders will pay $7 a year for every $10,000 invested. This index fund is a great option for investors looking for average stock exposure, but I doubt it will outperform the S&P 500 in the next few years (I’ll explain why in the last section).

The Vanguard S&P Small-Cap 600 ETF tracks the performance of 600 small-cap stocks, defined as companies with market values between $1.2 billion and $8 billion. The index fund includes value stocks and growth stocks from all sectors, but is heavily weighted in three market sectors: financials (18%), industrials (18%), and consumer discretionary (13%).

The top five points are listed below:

Solstice Advanced Materials: 0.6%
Arrowhead Pharmaceuticals: 0.6%
Moog: 0.5%
LKQ: 0.5%
InterDigital: 0.5%

The Vanguard S&P Small-Cap 600 ETF has returned 360% (10.7% annually) over the past 15 years, underperforming the S&P 500 by 231 percent. But it failed Russell 2000 (the benchmark for small stocks) by 60 percent due to strict eligibility criteria.

The Vanguard S&P Small-Cap 600 ETF has an expense ratio of 0.07%. This fund is a good option for investors who want exposure to small stocks. I think it will beat the Russell 2000 in the next five years, but I doubt it will beat the S&P 500.

Index funds that track companies with small and medium capitalizations have a major drawback: Stocks that perform well are eventually removed because their market values are above certain thresholds. But underperforming stocks are always there.

In that sense, small and mid-cap index funds sell winners and hold losers over time, and that’s not a smart investment strategy. The famous fund manager Peter Lynch once warned, “Selling the winners and holding the losers is like cutting the flowers and watering the weeds.”

The S&P 500 is a collection of winners that have graduated from the S&P Small-Cap 600 and the S&P Mid-Cap 400. Additionally, the S&P 500 is rebuilt and rebalanced each quarter, ensuring that it always tracks the best US stocks. That’s why I’d rather own an S&P 500 index fund than a small or mid-cap fund.

Before buying stock in Vanguard Admiral Funds – Vanguard S&P Mid-Cap 400 ETF, consider the following:

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Trevor Jennewine has no position in any of the listed stocks. The Motley Fool has positions and recommends Ciena, Coherent, Curtiss-Wright, Lumentum, and Moog. The Motley Fool recommends Flex and LKQ. The Motley Fool has a policy of disclosure.

Buy 2 Vanguard Index Funds to Beat the IS&P 500 Over the Next 5 Years, According to Wall Street Analysts was originally published by The Motley Fool.