Why S&P 500 ETF Might Fall Short: A Data-Driven Case for These Three Vanguard Alternatives

The Valuation Problem With Large-Cap U.S. Equity Exposure

The Vanguard S&P 500 ETF (NYSEMKT: VOO) commands significant investor attention for good reason—Vanguard pioneered index funds, and their track record of tight index matching combined with razor-thin fees remains unmatched. However, current market conditions present a critical challenge for this fund.

The S&P 500 currently trades at a forward price-to-earnings ratio of 22.1, marking historically elevated valuation levels. The cyclically-adjusted price-to-earnings ratio has reached points unseen since the dot-com bubble era. Simultaneously, interest rates have remained elevated longer than many anticipated, fundamentally altering the risk-reward equation between stocks and bonds. Vanguard’s capital markets analysis forecasts U.S. equities will deliver between 3.3% and 5.3% annualized returns over the next decade—a meaningful step down from historical averages.

This realization has prompted Vanguard’s analytical team to fundamentally restructure their recommended asset allocation model, suggesting a dramatic shift away from traditional stock-heavy portfolios.

The Case for Fixed Income: A Closer Look at Bond Market Opportunities

Vanguard’s time-varying asset allocation (TVAA) portfolio now recommends dedicating 70% of investor capital to fixed income—a striking reversal from conventional wisdom. The analytics supporting this shift are compelling: the U.S. aggregate bond market is projected to generate 4% to 5% annual returns with significantly lower volatility than equities.

The Vanguard Total Bond Market ETF (NASDAQ: BND) serves as the primary vehicle for U.S. fixed-income exposure, representing 37% of the recommended portfolio allocation. This fund currently offers a yield to maturity of 4.7%, tracking investment-grade bonds across the entire U.S. market. With an average effective maturity exceeding eight years, current holdings will appreciate if interest rates decline—a scenario many market observers expect.

Beyond domestic markets, international bond opportunities merit consideration. The Vanguard Total International Bond ETF (NASDAQ: BNDX) carries a 5.1% yield to maturity with an 8.6-year average maturity, projecting returns between 4.3% and 5.3% annually. This fund incorporates currency hedging to protect U.S.-based investors from foreign-exchange volatility. While the TVAA model allocates 21% of assets to international bonds, U.S.-based investors may rationally weight domestic bonds more heavily based on their overall financial circumstances.

Strategic Stock Selection: Why Value Outpaces Growth

The remaining 30% stock allocation in Vanguard’s model portfolio follows a deliberate strategy: heavy concentration in value stocks rather than broad market exposure. Growth stocks—currently dominating the S&P 500 through mega-cap technology holdings—carry Vanguard’s most pessimistic projection at just 1.9% to 3.9% annual returns. Value stocks, conversely, could deliver 5.8% to 7.8% annually according to their model.

The Vanguard Value ETF (NYSEMKT: VTV) represents the best value ETF option within Vanguard’s fund family for capturing this opportunity. This fund passively tracks U.S. large-cap value stocks while charging minimal fees. The valuation gap between value and growth segments has expanded to levels not witnessed since the dot-com correction, creating an exceptional entry point for value-oriented investors.

Beyond return potential, value stocks offer meaningful downside protection during market corrections and provide superior diversification relative to the increasingly concentrated S&P 500 index, where a handful of mega-cap holdings now dominate performance.

Balancing Theory With Practical Reality

While Vanguard’s 70/30 fixed-income-to-equity recommendation reflects current market mathematics, most investors should calibrate this guidance to their specific circumstances. Equities have historically outperformed all other asset classes over extended periods. For investors with multi-decade time horizons and no imminent need for capital, maintaining higher equity allocations remains prudent.

However, Vanguard’s analytical framework highlights a genuine opportunity: moderately increasing fixed-income allocation while deliberately tilting stock exposure toward value creates a portfolio better positioned for today’s market environment than simply loading additional capital into the S&P 500 ETF.