The S&P500(SNPINDEX: ^GSPC) The index is up 30% in the past year, and a fifth of that gain can be attributed to one stock: Nvidia(NASDAQ: NVDA). The chip giant has returned 186% over the past twelve months and, with a valuation of $3.6 trillion, represents 7% of the total value of the S&P 500.
But Nvidia is not alone. It’s part of a collection of tech giants called the ‘Magnificent Seven’, which have delivered an average return of 56% over the past year. The companies have a combined market capitalization of $16.9 trillion and represent 32.1% of the entire S&P 500.
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NVDA data by YCharts.
Simply put, investors without exposure to the tech stocks mentioned above have likely underperformed the broader market. But the good news is that they can easily get that exposure through a suitable exchange-traded fund (ETF).
The Vanguard Mega Cap Growth ETF(NYSEMKT: MGK) has almost half its portfolio invested in four of America’s largest technology stocks. It consistently outperforms the S&P 500 in the short and long term. Here’s why it’s a great buy for investors of all experience levels.
The Vanguard Mega Cap Growth ETF contains only 71 different stocks. The fund is highly concentrated: the technology sector represents 61.4% of the value of its portfolio, followed by the consumer discretionary sector with 20.3%.
In fact, the top four holdings alone represent 45.1% of the portfolio, but they are among the top artificial intelligence (AI) powers that virtually every investor wants to own.
Data source: Vanguard. Portfolio weights are accurate as of October 31, 2024 and are subject to change.
Apple just rolled out its Apple Intelligence software, which it developed with OpenAI. It offers a range of new AI features for owners of the latest iPhones, iPads and Mac computers, including powerful writing tools that can summarize and generate text content for emails or messages. Apple has more than 2.2 billion active devices worldwide and could therefore become the largest distributor of AI for consumers.
Nvidia provides the most popular graphics processing units (GPUs) for data centers for developing AI models. The company’s data center revenue generated triple-digit percentage growth in each of the past six quarters as demand continues to outpace supply. That momentum should continue as Nvidia brings its powerful new Blackwell GPUs to market, with CEO Jensen Huang recently describing demand as “mind-boggling.”
Microsoft and Amazon are two of Nvidia’s top customers. They fill their data centers with GPUs and rent the computing power to companies and developers to help them deploy AI models in an affordable way. Furthermore, both companies have developed their own AI chatbots and virtual assistants, which could become major revenue generators in the future.
Each of the Magnificent Seven stocks is in the top 10 of the Vanguard Mega Cap Growth ETF. But it’s not just about AI. The fund also owns stocks such as the pharmaceutical giant Eli Lillypayment powerhouse Visaretail titan Costco Wholesaleand fast food goliath McDonald’s.
The Vanguard Mega Cap Growth ETF is incredibly cheap to own. It has an expense ratio of just 0.07%, which is the portion of the fund that is deducted annually to cover management costs. Comparable funds have an average expense ratio of 0.94% (according to Vanguard), and such high fees can eat into investors’ returns in the long run.
The Vanguard Mega Cap Growth ETF has delivered a compound annual return of 13% since its inception in 2007, which is better than the S&P 500’s average annual gain of 10.2% over the same period.
The ETF has delivered an accelerated compound annual return of 15.9% over the past ten years. This is in line with the rapid adoption of technologies such as business software, cloud computing, smartphones and AI. That compares with an annual return of 13.2% in the S&P 500 over the past decade.
While AI isn’t the whole story for the Vanguard Mega Cap Growth ETF, this technology will have a huge impact on its returns in the future given the sheer size of its holdings in stocks like Nvidia, Apple, Microsoft, and Amazon. So, if AI delivers on some of Wall Street’s predictions, the ETF should do extremely well from here on out.
Goldman Sachs thinks AI will add $7 trillion to the global economy over the next decade, and PwC estimates that figure at $15.7 trillion by 2030. Those are just two of many multi-trillion dollar estimates published to date.
Conversely, if AI fails to live up to the hype, many stocks in the Magnificent Seven could lose a significant amount of value. That’s why investors should consider owning the Vanguard Mega Cap Growth ETF as part of a balanced portfolio that doesn’t already have a high degree of exposure to these tech giants.
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*Stock Advisor returns November 18, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Costco Wholesale, Goldman Sachs Group, Meta Platforms, Microsoft, Nvidia, Tesla and Visa. The Motley Fool 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.
Meet the spectacular Vanguard ETF with 45.1% of its portfolio invested in Nvidia, Apple, Microsoft and Amazon, originally published by The Motley Fool
