Key Points
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Even if it seems like they shouldn’t be, the world’s factories are surprisingly busy.
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Persistent inflation and higher interest rates are doing the financial sector more good than harm.
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It’s not just technology stocks losing their appeal. Some investors are starting to prepare for a more secular shift in market leadership.
- 10 stocks we like better than Vanguard World Fund – Vanguard Industrials ETF ›
They had a fantastic run. But the artificial intelligence (AI)-driven leadership of technology stocks finally seems to be winding down. As it turns out, AI isn’t quite as lucrative — or useful, or affordable — as initially envisioned. Now other groups of stocks are poised to take the lead, assisted by the move into the latter stages of an economic growth cycle.
With that as the backdrop, here’s a closer look at three of Vanguard’s exchange-traded funds (ETFs) that appear poised to outperform now that big tech isn’t.
Industrials
It’s interesting. Although the economy may feel sluggish, it’s certainly not because the nation’s factories aren’t humming. They’re as busy as they’ve ever been. The Federal Reserve’s industrial productivity index hit a multiyear high in May, eclipsing levels seen right before the COVID-19 pandemic took hold. Investment manager State Street’s most recent analysis of all sectors adds, “[the] ISM Manufacturing PMI [purchasing managers index] accelerated to 54.5 in May — its highest level in the past four years — but remains below past cycle peaks, signaling there may be more room to run.”
And it’s not just the U.S. China’s industrial output is still growing too, shrugging off the nation’s seemingly similar economic malaise. Even Europe is making progress. Rising manufacturing in any of these regions, of course, often requires and spurs heightened industrial output from another.
Granted, the rapid proliferation of AI data centers is a key driver of this ramped-up industrial output. It’s not a contradictory situation either. Although AI’s practicality and marketability may be disappointing so far, the industry is still moving ahead with plans to build more data centers. All told, the biggest names in the business intend to collectively invest more than $700 billion in AI infrastructure alone this year, while Goldman Sachs expects this capital expenditure (capex) figure to exceed more than $1 trillion next year, en route to $1.6 trillion in 2031. This will drive demand for everything from concrete to cooling systems to power-generation plants, all of which fall under the industrial sector’s umbrella.
To this end, State Street goes on to say in its recently published outlook:
The [industrial] sector’s broadening growth is also reflected in 2026 and 2027 growth expectations, with nine of the 12 underlying industries for the sector expected to post double digit growth in 2027, compared to six industries in 2026.
The Vanguard Industrials ETF (NYSEMKT: VIS) is already showing some of this underlying benefit in its performance. Like the industry itself, though, there’s more upside in the foreseeable future for these stocks than there is now.
Financials
Higher interest rates can be a double-edged sword for the financial sector. On one hand, higher interest rates translate into higher profit margins on lending and deposits. On the other, higher interest rates can crimp demand for loans and reduce the amount of idle cash that consumers and corporations have available to park in an interest-bearing account.
On balance though, banks, brokers, and other financial intermediaries have more reason to be excited than afraid at this time. Ditto for these companies’ investors. As brokerage firm Charles Schwab‘s (NYSE: SCHW) most recent update of its monthly, sector-based analysis explains, “Stronger fundamental conditions are resulting in improved earnings per share and dividend payouts.” It then adds, “The sector has lower valuations relative to the broader markets.”
And the analysis isn’t wrong. As agonizing as inflation has been for consumers lately, spending, borrowing, employment, and economic growth remain healthy. The U.S. Census Bureau reports retail and restaurant sales are up 4.3% year to date through May, while banks like Bank of America and Wells Fargo both saw their loan portfolios and deposits grow in Q1 without seeing any significant increase in charge-offs for delinquencies. The unemployment rate is holding steady at a relatively low 4.3% despite a wave of layoffs within the technology sector. Although the International Monetary Fund (IMF) recently lowered its worldwide 2026 growth outlook, it didn’t alter its expectation of a respectable 2.3% for the U.S.
This all bodes well for the Vanguard Financials ETF (NYSEMKT: VFH), which had been reflecting concerns that the U.S. economy was weaker than it now appears.
Value
Finally, add the Vanguard Value ETF (NYSEMKT: VTV) to your list of funds that should shine from here on as tech-led growth stocks lose some of their luster.
It’s more of a secular bet than a strategic one but a smart one all the same. That’s because higher inflation and interest rates tend to favor value stocks over growth stocks. We’re already seeing it in fact. The Vanguard Value ETF is up about 15% year to date versus the Vanguard Growth ETF’s (NYSEMKT: VUG) gain of only 7.5%, as investors have rethought what the future is apt to look like in this changing economic environment.
At least part of this outperformance can be chalked up to the extreme imbalance created by the rapid rise of what are now the market’s very biggest companies (as measured by market cap) like Nvidia and Apple. They’re all growth stocks, and their gains have skewed growth funds and indexes. If and when these stocks begin repricing — and this may already be happening — it’s going to take an oversized toll even on indexes like the S&P 500 (SNPINDEX: ^GSPC) that are supposed to be well-balanced. The Vanguard Value ETF doesn’t pose this risk simply because it’s not overweighted by a small handful of huge tech companies that are now vulnerable to an AI reality check.
The kicker: Although it’s not technically categorized as a dividend fund, Vanguard’s Value ETF plays that role reasonably well too. Its trailing dividend yield is a respectable 1.9%, but more than that, its quarterly per-share payment has more than doubled during the past decade. If growth-driven capital gains are going to fade from here, reliable dividends become a much more important source of continued growth for investors’ portfolios.
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Bank of America is an advertising partner of Motley Fool Money. Charles Schwab is an advertising partner of Motley Fool Money. Wells Fargo is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Goldman Sachs Group, Nvidia, Vanguard Growth ETF, and Vanguard Value ETF. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2026 $95 calls on Charles Schwab. The Motley Fool has a disclosure policy.
