2 Vanguard Index Funds to Buy to Beat the S&P 500 in the Years Ahead, According to Wall Street Analysts

Morgan Stanley analysts project seven-year annualized returns of 8.9% for emerging-market equities and 7.9% for Asia‑Pacific equities versus 6.3% for the S&P 500, citing relatively more attractive international valuations and high U.S. CAPE levels. The note highlights Vanguard FTSE Emerging Markets ETF (VWO) and Vanguard FTSE Pacific ETF (VPL) as convenient implementation vehicles (both with 0.07% expense ratios), lists their top holdings and sector tilts, and contrasts seven‑year trailing performance (S&P 500 +198%, VWO +71%, VPL +77%). The report flags tariff risk and the fallibility of long-range forecasts, recommending modest allocations to these international ETFs while maintaining a larger S&P 500 exposure.

Analysis

Market structure: Lower relative valuations in EM/APAC (MS estimate: EM 8.9% vs S&P 6.3% annualized over 7 years) make EM equities (VWO) and Asia-Pacific (VPL) natural beneficiaries of a rotation out of US mega-cap. Winners: TSM (10.3% weight in VWO), Samsung, Tencent, HDFC; losers: long-duration US growth if yields re-price. Flow mechanics imply EM equity inflows would (a) strengthen EM FX, (b) compress local yields, and (c) lift commodity exporters (oil, base metals) within 6–24 months.

Risk assessment: Key tail risks — a China regulatory reset or renewed US-China tariffs could erase 20–40% of EM equity value within weeks; Taiwan military escalation would crater semiconductors (>30% shock scenario). Immediate (days): ETF liquidity spikes and option vol; short-term (weeks–months): FX swings and sector rotation; long-term (years): structural re-rating or continued US AI-driven outperformance. Hidden dependencies include MSCI index weight rebalances and concentration risk (TSM >10%); catalysts to watch: PBOC easing (>25bps), US Fed pivot, and trade-policy announcements.

Trade implications: Implement modest, phased EM exposure with protective sizing — core long positions in VWO/VPL and concentrated long in Taiwan semis (TSM) funded by trimming US large-cap exposure (SPY/QQQ). Use relative-value pair trades to isolate regional vs. style risk (long VWO vs short SPY). Options: 6–12 month call spreads on VWO/VPL and 3-month SPY puts as portfolio insurance; calibrate sizes so total EM option premium ≤1–2% portfolio risk.

Contrarian angles: Consensus underestimates single-stock and index concentration risk; large passive inflows into VWO/VPL could amplify drawdowns if TSM or Tencent stumble. The case for EM outperformance is not binary — if USD re-strengthens or US earnings surprise upward by >10% next 6 months, EM could underperform sharply. Historical parallel: 2003–07 EM rerating required sustained earnings revisions and stable commodity cycle; absent those, early rotation may be cyclical not secular.

Key Decisions for Investors

• Establish a phased 3% portfolio long position in VWO over the next 30 trading days (add 1% increments); increase only on confirmed PBOC easing of ≥25bps or a 5% drop in S&P 500, and cut if VWO falls >12% from entry.
• Add a 2% portfolio long position in VPL (Japan/Australia/Korea) with a 9–12 month horizon; trim if VPL outperforms SPY by >20% on a trailing-3-month basis.
• Initiate a 12-month call spread on VWO sized at 0.75% portfolio notional: buy ATM call, sell 20% OTM call to cap cost — target gross return ≥3x premium if EM rerates; close on 30% profit or 40% loss of premium.
• Pair trade: long TSM (1.5% portfolio) vs short QQQ (1.5%) to express Asia semis over US growth; stop-loss 10% on the pair and take-profit when TSM outperforms QQQ by 25% relative.
• Buy 3-month SPY 5% OTM puts sized to 3% portfolio notional as insurance against a US-led shock; reassess if VWO/VPL relative performance vs SPY diverges >15% in 60 days or geopolitical/Taiwan risk spikes.