The S&P 500 has risen 13% this year as it has continued to hit record highs in 2025. But it's not doing as well as it has in recent years, when it was up by more than 20%. It could be losing steam, especially as the top stocks in the index become even more expensive and their upside diminishes.
One exchange-traded fund (ETF) that is beating the broad index this year and that I predict will continue to do so next year is the Vanguard Developed Markets Index Fund (VEA 0.86%). It's up an impressive 25%, and here's why it may be on track for another market-beating performance in 2026.
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A more diversified strategy could be a winning one next year
Trouble could be brewing for many U.S. companies in upcoming quarters as there could be a greater impact from tariffs and tough trade policies coming. Many businesses loaded up early in the year, before tariffs took effect, in an effort to at least stave off some of the effects. But it seems clear tariffs are not going away anytime soon, and that could mean trouble for an S&P 500 index that's dependent on U.S. businesses doing well.
A more diversified strategy, such as investing in companies based in other parts of the world, could be an effective one to deploy. The Vanguard FTSE Developed Markets ETF, which invests in companies outside of the U.S., has 53% of its holdings in Europe, 35% in the Pacific region, and just under 11% in North America. As countries outside the U.S. look to other trade routes to minimize their exposure to tariffs, that can result in new growth opportunities in developed markets, which is why this ETF may continue to do well next year.
The fund possesses many blue chip stocks trading at reasonable multiples
There's close to 3,900 stocks in this highly diversified fund, with top international companies such as SAP, AstraZeneca, and Roche being prominent ones within the top 10. In addition to the diversification, another excellent feature of the fund is that the average stock trades at a price-to-earnings multiple of just under 17. That's considerably lower than the S&P 500 average of 26.
With a more modest valuation and many strong blue chip stocks in its portfolio, the Vanguard fund can possess greater upside than the highly valued S&P 500 index, which may be overdue for a decline given how hot it has been in recent years and the challenges that many U.S. companies are currently facing as a result of tariffs.
While international companies are also facing similar problems due to tariffs, this is where having exposure to more modestly priced stocks can be crucial for investors in minimizing their downside risk, and providing them with a greater margin of safety.
Why the Vanguard fund can also be a solid option for the long term
I believe this Vanguard fund will outperform the S&P 500 index next year as the rally in non-U.S. stocks could very well continue. But even beyond that, for long-term investors, this ETF can make a lot of sense. It can help you diversify into other markets and make your portfolio less dependent on just U.S. stocks. Diversification can sometimes lead to underwhelming results when the market is doing well, but in times of adversity, having this type of fund can be crucial to reduce your overall risk.
The fund has a low expense ratio of just 0.03% and it also offers an attractive yield of 2.8%. Between that and its diversification, it can be an excellent option to hang onto for the long haul.
