By investing in top tech stocks, you can put yourself in a good position to beat the market.
Investing in the S&P 500 is great if you want minimal risk, and to generate some good, modest returns over the long haul. But what if you wanted more than that? There are plenty of exchange-traded funds (ETFs) that can offer lots of diversification, and that could have the potential to generate superior returns over the broad index.
One fund that has routinely outperformed the S&P 500 index is the Vanguard Information Technology Index Fund ETF (VGT 0.59%). Here's why you should consider adding this ETF to your portfolio.
A mammoth return over the past 10 years
Over the past decade, the S&P 500 has produced total returns (including dividends) of more than 230%. That averages out to a compound annual growth rate (CAGR) of 12.7%, which is better than the index's long-run average of 9.7%. But as good as that has been, that still pales in comparison to the mammoth 530% returns the Vanguard Information Technology Index Fund has amassed during that time. Those returns average out to a CAGR of 20.2%.
And in only one of the past 10 years has the S&P 500 been the better-performing investment. That was in 2022, when tech stocks crashed amid a rise in interest rates. That year, the Vanguard ETF suffered a near-30% decline while the S&P 500 fell by 18%. Going with the broader index would have been better that year, but that's the only time in the past decade where it has done better.
By and large, investors have been better off going with Vanguard's tech index fund. It also has a fairly minor expense ratio of 0.1%.
Why the Vanguard fund may continue to outperform
While the past doesn't predict the future, what makes this a good ETF to buy and hold is its broad portfolio. There are 320 holdings in the fund. While that's not as many as you'll get with the S&P 500, the ETF's focus on technology is what makes it a special buy, especially now, with companies eyeing opportunities in artificial intelligence, and seeing a need to upgrade their existing IT infrastructure.
Approximately 30% of the fund is made up of semiconductor stocks, followed by 22% of companies that are involved in systems software, 18% in technology hardware and storage, and another 13% that is involved with application software. Those four sectors of tech account for nearly 84% of the fund's total holdings, and they are all areas that may experience a lot of growth in the future.
The one caveat with the ETF is that it is heavy at the top, with Microsoft, Apple, and Nvidia accounting for 47% of its entire portfolio. For risk-averse investors, that may be a bit too much exposure to just a few stocks, especially if you're worried that they may be due for corrections. But those are also the leading companies in tech, and so it's also normal for these stocks to lead the charge; if they're doing well, tech stocks as a whole are also likely doing well.
Should you invest in the Vanguard Information Technology ETF?
The Vanguard Information Technology ETF is a solid fund to invest in, particularly if you're bullish on tech and want exposure to the top tech stocks in the world. While there's no guarantee that it will continue to outperform the S&P 500 in the future, it's definitely in a good position to do so. There's always the possibility of another down year for tech and growth stocks, but in the long run the fund is likely to generate some excellent returns for you.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. 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.
