Key Highlights
- Vanguard S&P Mid-Cap 400 ETF (IVOO) and Vanguard S&P Small-Cap 600 ETF (VIOO) forecasted to outperform the S&P 500 in next five years.
- S&P 500 is expected to return 39%, while S&P Mid-Cap 400 and S&P Small-Cap 600 are predicted at 41% and 42% respectively.
- Mid-cap ETF is heavily weighted in industrials, financials, and technology sectors but has underperformed due to low tech exposure.
- Small-cap ETF returns 360% over last 15 years, outperforming Russell 2000 by 60 percentage points.
The Vanguard Strategy: Double Down on Small and Mid-Cap Funds
You might think this is new, but… State Street Investment Management just released its global equities outlook for the next five years. They predict that the S&P 500 will return a modest 39%.
Meanwhile, the S&P Mid-Cap 400 and Small-Cap 600 are expected to deliver better returns at 41% and 42%, respectively.
Now, if you’re looking for a way to beat the S&P 500, State Street suggests you buy into these smaller cap funds. You could do worse than purchasing shares of the Vanguard S&P Mid-Cap 400 ETF (IVOO) and the Vanguard S&P Small-Cap 600 ETF (VIOO).
Mid-Cap Fund Details
The Vanguard S&P Mid-Cap 400 ETF measures over 400 mid-cap stocks, typically valued between $8 billion to $22.7 billion. It’s a mix of value and growth stocks across various sectors, with the heaviest weights in industrials (24%), financials (15%), and technology (14%). Not always.
One of the top holdings?
Ciena at 1%. Yes, that’s right. Ciena.
Flex is there too at 0.7%, alongside Coherent and Lumentum, each contributing a mere 0.8% to 0.9% of the portfolio. The fund has returned an impressive 365% over the last 15 years but don’t expect it to outperform the S&P 500 in the next few years.
Small-Cap Fund Insights
The Vanguard S&P Small-Cap 600 ETF tracks around 600 small-cap stocks, usually valued between $1.2 billion and $8 billion. It’s equally diverse with a heavy tilt towards financials (18%), industrials (18%), and consumer discretionary (13%).
On the top five holdings list: Solstice Advanced Materials at 0.6%, Arrowhead Pharmaceuticals, Moog, LKQ, InterDigital—each one contributing only 0.5%. This fund has delivered a solid 360% return over the last decade and change.
The S&P 500 Reigns Supreme
So why would I doubt that these smaller cap funds will outperform? Simple: They constantly sell winners and keep losers. The S&P 500, on the other hand, is a collection of established companies that have already graduated from mid-cap status.
Peter Lynch once warned, “Selling your winners and holding your losers is like cutting flowers and watering weeds.” That’s exactly what happens with mid-cap and small-cap funds. The S&P 500, however, reconstitutes itself quarterly to ensure it always tracks the most consequential U.S. companies.
Where to Invest?
The S&P is at all-time highs. UBS predicts it could climb to 7,500 by 2026. Meanwhile, Bill Gates warns that many investments might be “dead ends.” So where should you put your money?
The Motley Fool’s analysts have issued their latest report with the top five stock picks for 2026 and beyond.
But I’ll stick with what State Street says: Own an S&P 500 index fund. It’s a safer bet in the long run, even if it means you won’t beat the small and mid-caps every year.
