The S&P 500(SNPINDEX: ^GSPC) has been dominated by a handful of megacap growth stocks over the last few years. Their strong performance of these select stocks has led to the benchmark index posting total returns of 26%, 25%, and 18% in 2023, 2024, and 2025, respectively. Those returns are well above average, and it’s reasonable to expect a reversion to the mean going forward.
But while the growth stock-led S&P 500 has hit new all-time highs, many other stocks have been left in the dust. Analysts at Vanguard expect a couple of key groups of stocks to outperform over the next decade as a result. And the good news for investors is that it offers simple, inexpensive ETFs you can buy to invest in market segments poised to outperform the large-cap index.
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Vanguard analysts provide quarterly updates for investors on its Capital Markets Model forecasts. The model uses valuations to project long-term prospects for equities, bonds, and other asset classes as well as inflation.
Vanguard notes that valuations tend to be poor predictors of short-term returns but can be useful for longer-term predictions. As such, it doesn’t recommend using these predictions as the primary reason for changing portfolio allocations. That said, long-term outlooks can offer ideas for investors thinking about the markets going forward.
The most recent update from Vanguard’s model shows two segments of the market outperforming over the long run: small-cap stocks and value stocks. The analysts see small-cap stocks producing annualized returns of 6.2% and value stocks producing 6.8% average returns. That compares to expected returns of 4.9% for U.S. equities overall and 4.8% for large-cap stocks in particular.
With valuations as the core basis for Vanguard’s model, it’s easy to see why it expects small-cap and value stocks to outperform. At the start of 2026, the valuation spread between growth stocks and value stocks is at its widest since the peak of the dot-com bubble. The trailing P/E for the Russell 1000 Growth index was 39.32 compared to just 22.12 for the Russell 1000 Value index.
Likewise, the valuation gap between the large-cap S&P 500 and the small-cap S&P 600 is also notable. The S&P 500 traded for a forward P/E of 24 at the end of 2025 compared to a 16-times earnings ratio for the S&P 600. That’s despite similar earnings growth outlooks.
Overall, the long-term prospects for both value and small-cap stocks look promising based on valuation. Here are the two Vanguard funds you can use to take advantage.
For investors looking to tilt their portfolios toward small-cap and value stocks, Vanguard offers two simple and inexpensive ETFs to do just that.
The Vanguard Small-Cap ETF(NYSEMKT: VB) tracks the performance of the CRSP U.S. Small Cap Index. It’s highly diversified with over 1,300 stocks in the portfolio. Since it uses standard market-cap weighting, it lets stocks that appreciate in value take up a larger portion of the portfolio. It also reduces turnover, which can be a challenge for many small-cap index funds. With an expense ratio of just 0.03%, it’s one of the best-in-class options for small-cap index funds.
The Vanguard Value ETF(NYSEMKT: VTV) tracks the performance of the CRSP U.S. Large Cap Value Index, which includes the less expensive half of the broader market. It includes over 300 stocks, but it maintains a high level of diversification, as the largest holding accounts for just over 3% of the entire portfolio.
While the fund’s filter is based on simple valuation metrics, leaving it susceptible to value traps, market-cap weighting can mitigate that risk. It also keeps turnover low and costs down. The value ETF is inexpensive, sporting an expense ratio of just 0.03%.
Both ETFs have gotten off to a strong start in 2026. The value fund is up 4%, and the small-cap fund is up 3% compared to a decline of 1% in the S&P 500 year to date, as of this writing. But there’s still a lot of room for both to keep outperforming over the next decade. Either could be a great addition to a portfolio right now, adding some diversification.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds – Vanguard Small-Cap ETF and Vanguard Value ETF. The Motley Fool has a disclosure policy.
2 Vanguard Index Funds to Beat the S&P 500 Over the Next 10 Years, According to Analysts was originally published by The Motley Fool
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