The S&P 500 set a new all-time high in early January 2024, providing the final confirmation that the bull market (which began when the index bottomed in October 2022) was underway. Since then, the technology sector has continued to drive the market higher, led by trillion-dollar giants like Nvidia, Microsoft, and Apple.
The S&P 500 was up 15% in the first half of this year, with the 156% gain in Nvidia stock contributing about one-third of that entire return. In other words, investors who don’t have exposure to the tech sector are likely to underperform the broader market. Buying exchange-traded funds (ETFs) which hold a high concentration of technology stocks can be a simple way to get that exposure.
Here’s why investors with a spare $950 might want to allocate it toward buying a share of the Vanguard Growth ETF (NYSEMKT: VUG) and a share of the Vanguard Information Technology ETF (NYSEMKT: VGT).
1. Vanguard Growth ETF
The Vanguard Growth ETF holds 188 different stocks, but a whopping 59.8% of the fund is allocated to the technology sector. For context, the S&P 500 assigns a 31.4% weighting to technology, so this ETF is significantly concentrated by comparison.
That can be a blessing and a curse. When technology stocks lead the market, this ETF handily outperforms the S&P 500. But any sell-off in the tech sector leads to a much steeper relative decline in the ETF.
The top five holdings in the Growth ETF are exactly the same as the top five in the S&P 500. However, take note of the difference in weightings:
|
Stock |
Growth ETF Weighting |
S&P 500 Weighting |
|---|---|---|
|
1. Apple |
12.89% |
6.89% |
|
2. Microsoft |
12.39% |
6.70% |
|
3. Nvidia |
10.90% |
6.20% |
|
4. Amazon |
4.87% |
3.69% |
|
5. Meta Platforms |
4.15% |
2.24% |
Data source: Vanguard. Portfolio weightings are accurate as of July 31, 2024, and are subject to change.
All five companies are betting big on artificial intelligence (AI). Apple recently revealed its new Apple Intelligence software, which was developed in partnership with ChatGPT creator OpenAI. It will transform existing apps like the Siri voice assistant, and add new capabilities to other apps like iMessage and Mail. With over 2.2 billion active devices worldwide, Apple could soon become the largest distributor of AI to consumers.
Microsoft also used OpenAI’s technology to develop its Copilot virtual assistant. But Microsoft’s bigger AI opportunity might be in the cloud because its Azure platform is quickly becoming the go-to destination for businesses looking to develop AI applications.
Nvidia’s graphics processors (GPUs) for the data center are at the heart of the entire AI revolution. They are used by almost every company developing AI including OpenAI, Microsoft, Amazon, and Meta, to name just a few. Demand for GPUs continues to outstrip supply, which is driving a surge in Nvidia’s revenue and earnings.
Outside of its top five, the Growth ETF holds several other important tech stocks. They include Alphabet, Tesla, and Advanced Micro Devices. But it does offer a sprinkle of diversification because non-technology stocks like Eli Lilly, Visa, and Costco Wholesale are among the ETF’s top 20 holdings.
The Growth ETF has generated a compound annual return of 11.3% since it was established in 2004, which beats the 10.1% average annual return in the S&P 500 over the same period. However, the proliferation of technologies like enterprise software, cloud computing, and AI have propelled the ETF to a compound annual gain of 15.3% over the last 10 years. That represents an even greater outperformance compared to the 13.2% annual return in the S&P 500 over the past decade.
2. Vanguard Information Technology ETF
The Information Technology ETF might be a good option for investors who are comfortable with more risk in exchange for an even higher exposure to the leading names in the S&P 500. It holds 317 different stocks from 12 segments of the technology sector, specifically.
The semiconductor sector is the largest in this ETF with a 29.1% weighting, which perhaps isn’t a surprise given the surge in value of companies like Nvidia and AMD over the past year.
The composition of its top five holdings is slightly different from that of the S&P 500. But its top three holdings are the same, with substantially higher weightings:
|
Stock |
Information Technology ETF Weighting |
|---|---|
|
1. Apple |
17.21% |
|
2. Microsoft |
15.83% |
|
3. Nvidia |
14.07% |
|
4. Broadcom |
4.74% |
|
5. Salesforce |
1.68% |
Data source: Vanguard. Portfolio weightings are accurate as of July 31, 2024, and are subject to change.
Stocks like Adobe, AMD, and Oracle fall inside the top 10 in this ETF, whereas they are much further down the order in the S&P 500. That makes the ETF’s performance highly dependent on the success of technologies like AI, since that’s where those companies are investing an increasing amount of money.
The Information Technology ETF has delivered a compound annual return of 13.5% since its inception in 2004, so it has fared better than both the Growth ETF and the S&P 500. The same is true for its performance more recently, with an impressive compound annual gain of 20.2% over the last 10 years.
One minor drawback of the Information Technology ETF is its expense ratio of 0.1%, which is the proportion of the fund deducted each year to cover management costs. It’s slightly more expensive to own than the Growth ETF which has an expense ratio of 0.03%, and that can negatively impact returns over time. However, it’s still substantially cheaper than similar funds in the industry, according to Vanguard, which charge an average of 0.97%.
This ETF could be volatile given 47.1% of the value of its entire portfolio is invested in just three stocks, so it’s a good idea to own it as part of a balanced group of other ETFs. Alternatively, it could be a good addition to any portfolio which currently underweights the technology sector.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Advanced Micro Devices, Alphabet, Amazon, Apple, Costco Wholesale, Meta Platforms, Microsoft, Nvidia, Oracle, Salesforce, Tesla, Vanguard Index Funds-Vanguard Growth ETF, and Visa. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
2 Unstoppable Vanguard ETFs to Buy With $950 During the S&P 500 Bull Market was originally published by The Motley Fool
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