From investing beginners to market veterans, no investor can go wrong with the classic Vanguard S&P 500 ETF(NYSEMKT: VOO). It gives your portfolio an instant shot of broad diversification, its annual fees are vanishingly low, and it comes with a decent 1.3% dividend-like annual yield. You won't beat the market, since the fund actively matches the S&P 500(SNPINDEX: ^GSPC) index, which defines "the market" for most investors. But it's an easy way to benefit from the stock market's long-term gains with low risks and even lower fees.
But you can still do better.
As long as the tech sector is the main engine behind the broader market's gains, the Vanguard Information Technology ETF(NYSEMKT: VGT) feels like a secret weapon.
Building wealth with long-term investment strategies
First of all, a simple S&P 500 ETF can be a millionaire-maker. It just needs some combination of a large original investment, a long time in the market, and/or disciplined additional investments along the way.
However, a faster-growing fund can change the equation and get the job done sooner. Let's take a very simple example of a quite large initial investment of $75,000, left untouched for a couple of decades. Any dividends are reinvested in more shares of the same ETF. The Vanguard S&P 500 tracker would have grown to $523,000 over the last 13 years, but the tech-heavy Information Technology ETF crossed the million-dollar mark in the same period:
VGT Total Return Level data by YCharts
The S&P 500 did better than usual in this sample time span with an average total return of 14.7% per year. The technology fund soared ahead with am average return of 20.2%.
The risks and rewards of technology ETFs
You know what they say about past performance and future results. Wall Street's history book is not a perfect guide to what's coming up ahead. And it's also true that the Vanguard Information Technology fund isn't guaranteed to beat the market every year. It's easy enough to find periods where this ETF merely matched the S&P 500, and it will lag behind from time to time:
VGT Total Return Level data by YCharts
So this fund isn't a magic market-beating trick. It runs ahead when the tech sector is doing well, and that has generally been the case in recent years. In particular, you'll find the Information Technology fund outperforming its broader-based sibling over the last two years, thanks to the artificial intelligence (AI) market boom that started in November 2022. The tech-focused fund is up by 81% since then, while the S&P 500 gained 53%.
The tech fund's strategy and composition
The Information Technology ETF shares many of the core qualities of other Vanguard funds. It comes with minimal fees, a hands-off stock-picking approach based on an independently managed market index, and is a liquid asset with heavy daily trading volumes and $90.5 billion of assets under management. It's not quite as popular as the S&P 500 fund, but very few ETFs are.
This fund is heavily invested in semiconductors, software companies, and technology hardware. Three stocks each account for more than 10% of the total fund value, and they are exactly what you'd expect. Apple(NASDAQ: AAPL) is about 16% of the fund portfolio, followed by Nvidia(NASDAQ: NVDA) at 15% and Microsoft(NASDAQ: MSFT) at 13%. This lineup is not set in stone, but rebalanced as market conditions change. Nvidia was just a 4% holding two years ago, leaving more room for Apple and Microsoft at the top.
If that's a strategy you can appreciate, the Vanguard Information Technology ETF could be for you. It has served me well in recent years and I expect the AI frenzy to keep the engines running for the foreseeable future. It won't always be a market-beater, but I'm OK with the occasional slowdown as long as the long-term trends are positive.
Should you invest $1,000 in Vanguard World Fund - Vanguard Information Technology ETF right now?
Before you buy stock in Vanguard World Fund - Vanguard Information Technology ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard World Fund - Vanguard Information Technology ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $900,893!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of November 18, 2024
Anders Bylund has positions in Nvidia, Vanguard S&P 500 ETF, and Vanguard Vanguard Information Technology ETF. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool 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.
