Nvidia (NASDAQ: NVDA) So far in 2024, the stock price is up 181%, and the current market cap of $3.3 trillion now accounts for 7% of the stock’s total value. S&P500. As a result, Nvidia alone is responsible for a third of the 15.7% gain in the index this year.
Simply put, investors without exposure to the largest US tech stocks – especially those developing artificial intelligence (AI) – have missed out on significant returns in 2024. With rising stock prices, the technology sector will likely continue to lead the S&P 500 higher.
Buying an exchange-traded fund (ETF) is a great way for investors to expose their portfolios to this trend without having to pick individual stocks. Vanguard Information Technology ETF (NYSEMKT: VGT) is an excellent option. It’s issued by one of the largest ETF operators in the world, it’s very cheap to own compared to its peers, and it contains the most popular AI stocks.
The Vanguard ETF contains all the technology stocks investors could want
This ETF contains 321 stocks from different segments of the technology industry. While that sounds diversified, it is heavily weighted toward the top five holdings, which represent 52.6% of the portfolio’s total value. However, that top five includes some of the most elite AI stocks investors could wish for:
|
Ranking/Stock |
Portfolio weighting of Vanguard Information Technology ETF |
|---|---|
|
1.Microsoft |
16.71% |
|
2. Apple |
15.85% |
|
3. Nvidia |
14.02% |
|
4. Broadcom |
4.17% |
|
5. Advanced micro devices |
1.92% |
Data source: Vanguard. The portfolio weights are accurate as of May 31, 2024 and are subject to change.
Microsoft has risen to the top of the AI software industry. Early last year, it invested another $10 billion in ChatGPT maker OpenAI, using the startup’s latest GPT-4 models to create an AI assistant called Copilot, which is now woven into the most popular products such as Windows and 365. The Azure cloud platform has become an entry point for thousands of companies looking to develop their own AI applications.
Apple, on the other hand, could become the world’s largest distributor of AI to consumers. It recently unveiled Apple Intelligence (in partnership with OpenAI), which will soon bring AI to its 2.2 billion active devices around the world, led by the flagship iPhone.
But no tech ETF would be complete without Nvidia. Developing the most advanced AI models wouldn’t be possible without data center graphics processing units (GPUs). The company recently unveiled its new Blackwell GPU architecture, paving the way for chips like the GB200, which will be five times faster than Nvidia’s H100, which already dominates the industry.
Broadcom And Advanced micro devices are two more AI hardware games; Broadcom sells networking hardware for the data center, and AMD recently launched a line of GPUs to compete with Nvidia. Moreover, it dominates another important segment of the AI computing space.
Outside of the top five, the Vanguard ETF owns a number of other important AI infrastructure stocks, such as Oracle And Micron technology. However, it also owns shares in successful companies that are now applying AI to improve their existing operations CrowdStrike And Data hound.
The Vanguard ETF crushes the S&P 500, but beware of concentration risk
The Vanguard Information Technology ETF is incredibly cheap to own. It has an expense ratio of just 0.1%, which is the portion of the fund that is deducted annually to cover management costs. Comparable funds can be almost ten times more expensive, which has a significant impact on long-term returns.
Speaking of which, the ETF has delivered a compound annual return of 13.2% since its inception in 2004, which is much better than the S&P 500’s average annual gain of 9.9% over the same period.
But thanks to the rise of technologies such as cloud computing, enterprise software and AI, the ETF generated a compound annual return of 20.3% over the past decade. That crushes the 12.7% annual return in the S&P 500 over the same time frame, and the difference is huge in dollar terms:
|
Starting balance |
Compound annual return |
Balance after 10 years |
|---|---|---|
|
$10,000 |
20.3% for the Vanguard ETF |
$63,482 |
|
$10,000 |
12.7% for the S&P 500 |
$33,055 |
Data source: Calculations per author.
If AI stock continues to lead the S&P 500 higher, this ETF will almost certainly continue to outperform the index. Global consultancy PwC thinks AI will add $15.7 trillion to the global economy by 2030, so there could still be a significant amount of value unlocked.
If for some reason AI fails to live up to the hype, stocks like Nvidia, Microsoft and Apple could wipe out some of their incredible gains over the past year, leading to a period of underperformance for the ETF. This is called concentration risk, and it’s something every investor should consider before buying an ETF that is so heavily weighted to just a few stocks.
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Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Apple, CrowdStrike, Datadog, Microsoft, Nvidia, and Oracle. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
1 Unstoppable Vanguard ETF to Buy With $600 During the S&P 500 Bull Market was originally published by The Motley Fool
