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

Vanguard’s Capital Markets Model says value stocks and small-cap stocks should each outperform over the next 10 years, with projected annualized returns of 6.9% and 6.8% versus 5.9% for the total U.S. equity market and 5.8% for large caps. The article highlights persistent valuation gaps, including the S&P 500 Pure Growth index trading above 2x the forward P/E of the Pure Value index and the large-cap/small-cap forward P/E ratio around 1.3. It recommends Vanguard Value ETF (VTV) and Vanguard Small-Cap ETF (VB) as low-cost ways to tilt toward those segments.

Analysis

The market message here is less “buy value and small caps” and more “the dispersion trade is still alive.” When forward multiples stay stretched for multiple years, the first-order move can be a style rotation, but the second-order winners are the businesses that benefit from cheaper capital, higher domestic cyclicality, and less crowded ownership—especially regional banks, industrials, and domestically focused cyclicals that sit inside value benchmarks. That creates a broader opportunity set than the two ETFs highlighted, because the most mispriced exposure may be in individual names with balance-sheet repair or operating leverage rather than the index wrappers themselves.

The key risk is that mean reversion in valuation can be delayed by a regime shift in earnings growth. If large-cap growth continues to compound cash flows faster than the rest of the market, the relative P/E gap can remain elevated far longer than historical averages would imply, especially in a low-rate disinflationary backdrop. In that scenario, value underperforms on a beta-adjusted basis even if absolute returns are positive, and small caps remain hostage to funding costs and refinancing needs.

The more interesting contrarian angle is that the setup may be better expressed as a hedge against concentration risk than a clean directional bet on cheapness. Small caps and value historically outperform when breadth improves, but that often begins after the market stops rewarding passive mega-cap leadership; until then, owning the cheap basket outright can be a value trap if earnings revisions stay negative. The article’s cited AI-adjacent narrative also matters: if capital spending remains anchored to a few platform winners, the index-level diversification benefit of value/small-cap exposure grows, but so does the risk that index returns are dominated by a narrow set of tech beneficiaries outside these ETFs.

From a positioning standpoint, the near-term setup looks more like a 6-12 month relative-value trade than a “put it away for a decade” thesis. The cleanest trigger is a flattening in earnings revisions for mega-cap growth coupled with even modest monetary easing or lower financing spreads for smaller issuers; absent that, the trade can bleed slowly despite looking cheap on paper.

Key Decisions for Investors

• Go long VTV vs short QQQ on a 6-12 month horizon to express valuation mean reversion without taking outright market beta risk; target 5-8% relative upside if breadth expands, with the main risk being continued mega-cap earnings outperformance.
• Add a basket long in high-quality small caps via VB, but hedge with index futures or QQQ puts for the next 3-6 months; this isolates the smaller-cap funding-rate relief trade while limiting drawdown if growth leadership persists.
• Overweight domestically oriented value beneficiaries inside the index, especially financials and industrials, rather than the broad ETF alone; the best risk/reward is in firms with clean balance sheets and positive revisions, not the cheapest names.
• If using options, buy 6-9 month call spreads on VTV and finance partially by selling upside in QQQ; this is a lower-carry way to position for a style rotation that may take quarters to unfold.
• Avoid chasing VB outright if credit spreads widen or the market re-prices recession risk; that would hit small caps first and could erase the valuation argument before it translates into price performance.