Beating the Index: A Modest Proposal

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The Oracles of FactSet – a somewhat unreliable bunch, given their fondness for predicting the future whilst simultaneously being surprised by it – have declared that the Grand Index, known colloquially as the S&P 500, shall reach a dizzying height of 8,338 in the coming year. A 28% ascent, they say. Which, if true, would be… noticeable. Of course, predicting the future is a bit like trying to herd cats wearing roller skates. But let’s assume, for the sake of argument, that they’re not entirely delusional.

However, two sectors are predicted to outperform even this optimistic forecast. The first, the realm of Information Technology, is expected to climb a frankly alarming 39%. The second, Consumer Discretionary – that is, everything people buy when they’ve finished paying for the necessities like bread and slightly less leaky roofs – is projected to rise a respectable 30%. These are, naturally, the places where all the interesting things happen… and where most of the money disappears.

Now, one could attempt to pick individual stocks in these sectors. A fool’s errand, I assure you. It’s akin to trying to catch smoke with a sieve. Far better to invest in broad-based index funds. Specifically, the Vanguard Information Technology ETF (VGT) and the Vanguard Consumer Discretionary ETF (VCR). Vanguard, you see, is a rather peculiar institution. It doesn’t try to beat the market. It simply is the market, or a very large piece of it. A bit like a benevolent, slightly bureaucratic dragon hoarding wealth for the common good… or at least, for anyone with a brokerage account.

1. Vanguard Information Technology ETF

This fund, VGT, contains a collection of 318 companies engaged in the arcane arts of software, cloud services, hardware, and the creation of those tiny, mysterious silicon wafers we call semiconductors. It’s a world of flashing lights, complex algorithms, and people who speak in acronyms. A bit like a particularly complicated clockwork mechanism, really.

The top five holdings, as of last accounting, are:

  1. Nvidia: 18.1% – They make the things that make the pictures move. And apparently, they’re very good at it.
  2. Apple: 15.8% – They make the things people queue up overnight to buy. The logic escapes me.
  3. Microsoft: 10.4% – They make the things that occasionally ask you to reboot.
  4. Broadcom: 4.3% – They make the things that make the other things work.
  5. Micron Technology: 2.4% – They make the things that forget things.1

Over the past two decades, VGT has experienced a growth of 1,570%, or 15.1% annually. This is more than double the S&P 500’s return of 636% (10.5% annually). The information technology sector, you see, has been rather good at inventing things people want… or at least, things people are persuaded they need. The proliferation of cloud computing and artificial intelligence (AI) has been particularly lucrative. Though, one does wonder if AI will eventually decide it doesn’t need us.

Risks abound, of course. The semiconductor industry is notoriously cyclical. And the current obsession with AI is… complicated. There’s a great deal of spending on infrastructure, which may or may not prove worthwhile. And there’s the nagging fear that AI will disrupt the software industry, rendering entire professions obsolete.2

My assessment? This fund provides exposure to companies likely to benefit from AI, which may be the most transformative technology in decades. It’s also cheap, with an expense ratio of 0.09%. The only reservation is concentration risk. Three companies account for 44% of its performance. Investors comfortable with that risk should consider buying a small position today.

2. Vanguard Consumer Discretionary ETF

VCR, as it’s known, contains a collection of 286 companies involved in the manufacturing and sale of things people buy when they have disposable income. Broadline retail, automobiles, restaurants, hotels, cruise lines, home improvement… the usual suspects. It’s a world of marketing, branding, and carefully crafted illusions. A bit like a particularly elaborate stage production, really.

The top five holdings, weighted accordingly, are:

  1. Amazon: 23.4% – They sell everything. And they know a great deal about you.
  2. Tesla: 16.6% – They make electric cars. And a lot of hype.
  3. Home Depot: 5.3% – They sell things people need to fix their houses. Which, let’s face it, is a never-ending task.
  4. McDonald’s: 3.7% – They sell… well, you know what they sell.
  5. TJX Companies: 2.7% – They sell things people think are bargains.

Over the past two decades, VCR has grown by 731%, or 11.1% annually. This beats the S&P 500’s return of 636% (10.5% annually). The proliferation of e-commerce has been a major driver of this growth. Though, one does wonder if we’ll eventually reach a point where we simply run out of things to buy.

Risks to this sector include tariffs and rising gasoline prices, both of which could reduce consumer spending, the most consequential driver of economic growth. According to the Charles Schwab Center for Financial Research, the sector is highly exposed to economic conditions and thus vulnerable to a slowing economy and reduced consumer confidence and spending.

My assessment? This fund is likely to perform well during periods of strong economic growth. It’s relatively cheap, with an expense ratio of 0.09%, but also very concentrated. Three companies account for 45% of its performance. Investors comfortable with that risk should consider buying a small position today.

I would start with a small position because the economy is in a somewhat precarious spot right now. Tariffs have coincided with a slowdown in GDP and jobs growth, and rising oil prices could push the economy into a recession, according to Moody’s chief economist Mark Zandi. In that scenario, consumer discretionary stocks would probably fall more sharply than the broader S&P 500, as would technology stocks.

1 A crucial function, if you think about it. Without forgetting, where would we be?

2 A perfectly reasonable fear, given the relentless march of technological progress.

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2026-03-24 11:12