Key Points
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The Wall Street consensus says the communication services and information technology sectors will beat the S&P 500 over the next year.
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The Vanguard Communication Services ETF underperformed the S&P 500 over the past 20 years, but its current valuation is attractive.
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The Vanguard Information Technology ETF crushed the S&P 500 over the past 20 years, and that trend could continue as the AI boom unfolds.
- 10 stocks we like better than Vanguard World Fund – Vanguard Communication Services ETF ›
Wall Street’s median forecast puts the S&P 500 (SNPINDEX: ^GSPC) at 8,988 by July 2027. That implies 20% upside from its current level of 7,518. The driving force will be particularly large gains in the communication services and technology sectors, which are projected to increase 25% and 27%, respectively, over the same period, according to FactSet Research.
Put differently, most Wall Street analysts think investors can beat the S&P 500 during the next year if they buy index funds that track those market sectors. Two good options are the Vanguard Communication Services ETF (NYSEMKT: VOX) and Vanguard Information Technology ETF (NYSEMKT: VGT).
Here are the important details.
1. Vanguard Communication Services ETF
The Vanguard Communication Services ETF measures the performance of 114 stocks in the communications services sector. The index fund is most heavily weighted toward three industries: telecommunications, interactive media, and entertainment. The five largest holdings are, as listed by weight:
The communication services sector badly underperformed the broader S&P 500 over the last two decades. Over that period, the Vanguard Communication Services ETF achieved a total return of 410% (8.5% annually), while the S&P 500 achieved a total return of 793% (11.5% annually).
However, the opposite could happen over the next year and beyond. The communications services sector currently trades at 17.4 times earnings. That valuations multiple looks quite reasonable compared to Wall Street’s consensus estimate, which says sector earnings will increase at 17% annually through 2027.
Here’s the bottom line: With an expense ratio of 0.09%, this Vanguard ETF is a good choice for investors that want more exposure to communication services stocks, particularly Alphabet and Meta Platforms. The current valuation is attractive, but with over 40% of the fund concentrated in two companies, shareholders should anticipate volatility.
2. Vanguard Information Technology ETF
The Vanguard Information Technology ETF measures the performance of 323 stocks in the information technology sector, which includes three major industries: software and cloud services, technology hardware and equipment, and semiconductors and semiconductor manufacturing equipment. The five largest holdings are:
The information technology sector was the best-performing sector in the S&P 500 over the past two decades. In that time, the Vanguard Information Technology ETF achieved a total return of 2,510% (17.7% annually). Meanwhile, the S&P 500 achieved a total return of 793% (11.5% annually).
Technology stocks are well positioned to outperform in the future as the artificial intelligence boom continues. The technology sector currently trades at 36.6 times earnings. On the surface, that appears to be a very rich valuation. But Wall Street expects sector earnings to grow at 44% annually through 2027. In that context, the current valuation is actually reasonable.
Here’s the bottom line: With an expense ratio of 0.09%, this Vanguard ETF is a cheap and convenient way to get exposure to technology stocks, especially Nvidia, Apple, Microsoft, Broadcom, and Micron. But that sword cuts both ways: 50% of the index is concentrated in those five companies, which makes it more risky than a broader index fund.
Personally, I would keep a larger percentage of my portfolio in an S&P 500 index fund, such as the Vanguard S&P 500 ETF. Its greater diversification makes me feel more comfortable. However, risk-tolerant investors who want additional exposure to communication services and/or technology stocks should consider buying small positions in the index funds discussed above. Doing so could help you beat the market during the next year.
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Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, Broadcom, FactSet Research Systems, Meta Platforms, Micron Technology, Microsoft, Nvidia, and Walt Disney. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
