Since its inception in 1957, the S&P 500 has delivered an average annual return of about 10%. Because most funds underperform the index over the long term, Vanguard founder John Bogle once advised investors: “Don’t look for the needle in the haystack. Just buy the whole haystack.”
To simplify this process, Vanguard launched the first S&P 500 index fund—the Vanguard S&P 500 Index Fund (VFINX)—in 1976, followed by the Vanguard S&P 500 ETF (VOO) in 2000, which allows active trading throughout the trading day. Both low-cost funds have provided long-term investors with reliable market-tracking returns.
In 2004, Vanguard introduced the Vanguard Consumer Staples ETF (VDC). This fund outperformed the S&P 500 during the 2007–2009 financial crisis and throughout 2022. Why has this defensive ETF beaten the market? And is it more worth holding for the long term than VOO?
VDC passively tracks the MSCI US IMI Consumer Staples 25/50 Index, which covers 104 small-, mid-, and large-cap stocks in the consumer goods sector. However, this is a market-cap-weighted index with a median market cap of $257.3 billion, meaning its largest holdings are all big companies. Its top five holdings are: Walmart (16.2% of the portfolio), Costco (12.3%), Procter & Gamble (9.1%), Coca-Cola (8.4%), and PepsiCo (4.5%).
The index focuses on companies that provide non-discretionary goods—such as food, beverages, household products, personal care items, and tobacco—which people continue to buy even during economic recessions. That is precisely why it outperformed the S&P 500 during the financial crisis and the 2022 interest rate shock, as the latter covers a much broader range of companies.
VDC is a solid defensive choice in bear markets, but it has underperformed VOO over the long term because bull markets drive investors away from defensive stocks. Over the past decade, VDC’s price has risen only 20%, while VOO’s price has surged about 80%. VOO also has a significantly lower expense ratio of 0.03% compared to VDC’s 0.09%.
If you do not plan to hold core stocks for at least a few years and expect a market crash in the near future, VDC could be an attractive investment. But if you are a long-term investor, allocating too much of your portfolio to VDC is unwise. It is a good defensive tool to hedge against the next market downturn, but it is not designed to beat the market over the long haul.
Conclusion: VDC has a proven track record of outperforming the S&P 500 in bear markets thanks to its defensive consumer staples holdings, but its long-term returns are far inferior to VOO’s. Investors should weigh their own investment horizons and market outlooks: for short-term risk avoidance, VDC is a choice; for long-term growth, VOO remains the better option.
