The Vanguard Information Technology ETF (NYSEARCA:VGT) tracks the MSCI US Investable Market Information Technology 25/50 Index, focusing solely on U.S. tech stocks. This exchange traded fund holds a wide range of tech companies in its portfolio, with a particularly high weighting to mega-cap growth stocks such as Apple, Microsoft, Nvidia, Broadcom, and Oracle. These five stocks alone comprise roughly half of the VGT portfolio, despite the overall number of holdings amounting to more than 300.
Due in large part to this large-cap exposure, the VGT ETF has outperformed most ETFs, seeing a 23.3% compounded average return over the past five years. This means the fund has nearly tripled an investor’s initial capital over just five years, a feat few ETFs can lay claim to.
Rapid adoption of AI technology have certainly bolstered the ETF’s returns, with the company’s top five holdings clear beneficiaries of this trend. Accordingly, investors who are bullish on the future for artificial intelligence and AI-related stocks may want to give this fund a closer look.
Aside from the ETF’s obvious AI tailwinds, here are three additional reasons I think investors may want to consider this tech-focused ETF over other index funds (which also tend to have high weightings to VGT’s top holdings).
Key Points About This Article:
- The Vanguard Information Technology ETF (VGT) is among the top options in the market for investors looking to generate outsized exposure to mega-cap tech stocks.
- Aside from various AI tailwinds, here are three key reasons why investors may want to consider this particular fund.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
Strong Historical Performance
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First off, it’s important to underscore the fact that VGT has a history of strong performance. How strong, you may ask?
Well, the fund’s five year performance, which has turned a $10,000 investment into more than $28,000 for investors, stands heads and shoulders among most ETFs. Over the very long-term, such compounding can really add up, and depending on when an investor started adding to VGT (and what their cost base is), there’s reason to believe that plenty more upside is ahead. For those bullish on the future of tech companies (driven by the AI revolution), this ETF’s high level of exposure to these growth trends can work wonders for a portfolio over a very long period of time.
That’s certainly not to say we won’t have volatility along the way. And the fund’s average annual return of more than 20% is a return many may rightly assume isn’t going to be sustainable over the long-term. After all, the overall stock market tends to grow at a long-term rate closer to 10%. So, many investors may feel that perhaps the timing isn’t right for adding exposure to such a fund.
However, my long-standing view has been that dollar cost averaging into ETFs like VGT can provide significant long-term growth. Those looking for meaningful portfolio growth (who are young enough to see the effects of compounding for retirement) may certainly want to consider adding a certain amount of money each month to this fund. If it drops, you get more shares. And when the market bounces back, this is an ETF that has proven its ability to outperform in bull markets.
Fees Matter
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Perhaps one of the factors I like most about the VGT ETF is the fund’s very low expense ratio.
That’s because while compounding is great, it doesn’t really mean anything if your returns are eaten up by management fees. In the case of VGT, a very low management expense ratio (MER) of only 0.1% means that for every $10,000 invested, an investor can expect to pay around $10 per year for exposure to this fund. And with a dividend yield of 0.64%, this fund more than makes up for its costs in terms of the small but meaningful yield investors will get over time.
Importantly, this MER is also significantly lower than the industry average, which is around 0.58%. So, in addition to a dividend yield that’s above that amount, investors aren’t seeing their gains eaten away by fees. That’s important for those with a long-term investing time horizon.
It’s long been my view that focusing on ETFs with the broadest diversification of stocks at the lowest price is generally a good thing. This tech-focused fund is among the best in this regard, particularly for those looking for targeted exposure to growth trends in the tech space. Other index funds won’t provide this kind of leveraged upside to the growth of the tech sector.
Exposure to Leading Tech Growth Companies
A chart of growth stocks
That brings me to my last point. The VGT ETF provides world-class exposure to leading technology companies. This means that when you invest in VGT, you’re actually investing in many of the biggest and most successful tech companies in the world. Companies like Apple, Microsoft, and Google are part of this fund’s holdings. These companies are known for creating innovative products and services that people use every day.
VGT provides investors with substantial exposure to major technology firms, particularly in the rapidly growing fields of artificial intelligence (AI) and cloud computing. The ETF’s top three holdings—Apple, Microsoft, and Nvidia—account for over 47% of its portfolio. These companies are positioned to benefit significantly from advancements in AI and related technologies. Additionally, VGT includes a diverse range of other tech stocks, providing broad exposure to various segments within the technology sector.
For those looking to not only capitalize from the rise of AI, but the increasingly ubiquitous reality of how pervasive technology is in our daily lives, this is the ETF to do so.
Wrapping It Up
Three tech support individuals on calls
Technology plays a huge role in shaping how our world will evolve moving forward. And with most of the growth in the U.S. economy coming from technology-related innovations, this is the ETF that investors who are looking to capitalize on this growth over a long period of time may want to consider.
Again, I do think there will be volatility ahead. Dips will come, and this is a sector that’s seeing some rather incredible valuations form.
However, I also think that investing in such a fund over the next 10 to 20 years can provide massive capital appreciation potential to investors willing to stomach some volatility. Again, my strategy with such a fund would be to dollar cost average in, but to each investor their own.
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