Prediction: This Unstoppable Vanguard ETF Will Beat the S&P 500 Again in 2026

While the S&P 500's 13% year-to-date gain faces headwinds from expensive top stocks and potential U.S. tariff impacts, the Vanguard Developed Markets Index Fund (VEA) has significantly outperformed with a 25% return and is positioned for continued strength. This outperformance is attributed to VEA's diversified exposure to non-U.S. developed markets, offering a more attractive average P/E under 17 compared to the S&P 500's 26, and comprising nearly 3,900 blue-chip stocks. This strategy provides a potential hedge against U.S. market concentration and valuation risks, alongside long-term benefits like a low 0.03% expense ratio and a 2.8% yield.

Analysis

The S&P 500 has achieved a 13% year-to-date gain, reaching record highs in 2025, yet its pace has slowed compared to previous years' 20%+ returns. Concerns are emerging regarding the index's sustainability, driven by increasingly expensive top stocks, diminishing upside potential, and the anticipated negative impact of tariffs and tough trade policies on U.S. businesses. This suggests a potential shift in market dynamics favoring more diversified strategies.

In contrast, the Vanguard Developed Markets Index Fund (VEA) has significantly outperformed, posting an impressive 25% return year-to-date, and is projected for continued strength. This outperformance is attributed to its diversified exposure to non-U.S. developed markets, with 53% of holdings in Europe, 35% in the Pacific region, and under 11% in North America. This geographical spread offers a strategic hedge against U.S.-centric risks, particularly trade tariffs.

The VEA fund presents a compelling valuation proposition, with its average stock trading at a price-to-earnings multiple of just under 17, substantially lower than the S&P 500's average of 26. Comprising nearly 3,900 blue-chip stocks, including prominent international companies like SAP and AstraZeneca, the fund offers a greater margin of safety and potential upside compared to the highly valued S&P 500.

For long-term investors, VEA's appeal is further enhanced by its low expense ratio of 0.03% and an attractive yield of 2.8%. This combination of diversification, reasonable valuation, and cost-efficiency positions the ETF as a robust option for reducing portfolio dependence on U.S. stocks and mitigating overall risk, especially during periods of market adversity.

Key Decisions for Investors

• Consider re-evaluating portfolio allocations to increase exposure to diversified international developed markets, given the S&P 500's high valuations and potential U.S. tariff headwinds.
• Evaluate the Vanguard Developed Markets Index Fund (VEA) as a strategic component for its attractive valuation, broad diversification across non-U.S. blue-chip stocks, low expense ratio, and yield, offering potential outperformance and risk mitigation.
• Monitor global trade policy developments closely, as continued tariff pressures could further differentiate performance between U.S. and international markets, favoring funds like VEA.