The S&P 500 (SNPINDEX: ^GSPC) continues to set new records, extending the bull market that began when the index bottomed in Oct. 2022. The technology sector is leading this incredible run thanks to its powerful earnings growth and innovation in areas like artificial intelligence (AI).
Since the S&P 500 is weighted by market capitalization, the largest companies in the index have a greater influence over its performance than the smallest. It’s currently sitting on a gain of 20% year to date, significantly better than the 12% gain for the S&P 500 Equal Weight index (which assigns the same weighting to every stock regardless of size).
The difference can be explained by the whopping 53.2% average return of the top five S&P 500 stocks this year: Apple, Microsoft, Nvidia, Amazon, and Meta Platforms.
Since the AI revolution is still in its infancy, the technology sector will likely continue leading the S&P 500 higher. Therefore, an exchange-traded fund (ETF) with a focus on technology stocks could be a great portfolio addition. Here’s why the Vanguard Information Technology ETF (NYSEMKT: VGT) might be the perfect choice for growth-hungry investors.
Every popular tech stock in one ETF
The Vanguard Information Technology ETF holds 317 stocks spread across 12 segments of the tech sector. The semiconductor sector has the highest weighting in the ETF at 28.9%, which is no surprise given the meteoric growth of companies like Nvidia over the past year due to the demand for AI chips.
Despite holding a large number of different stocks, the top five positions in the ETF account for 50.3% of the total value of its portfolio. It also holds each of those stocks at a substantially higher weighting than in the S&P 500:
|
Stock |
Vanguard ETF Portfolio Weighting |
S&P 500 Weighting |
|---|---|---|
|
1. Apple |
16.23% |
6.97% |
|
2. Nvidia |
14.07% |
6.20% |
|
3. Microsoft |
13.92% |
6.54% |
|
4. Broadcom |
4.44% |
1.50% |
|
5. Adobe |
1.72% |
0.54% |
Data source: Vanguard. Portfolio weightings are accurate as of Aug. 31, 2024, and are subject to change.
All five of the above companies are deploying AI in some capacity. Apple is rolling out its Apple Intelligence software on the latest iPhone, iPad, and Mac devices. It will transform the way its users consume and generate content like texts and emails. And since it’s powered by OpenAI, the Siri voice assistant could soon have all the knowledge and capabilities of ChatGPT. Apple has over 2.2 billion active devices worldwide, so it could quickly become the largest distributor of AI to consumers.
Nvidia designs the most powerful graphics processing units (GPUs) for the data center, which developers use to build AI models. It’s about to scale up shipments of its latest Blackwell-based GPUs, which offer up to 30 times better performance than its flagship H100, which set the benchmark for the industry last year. Broadcom also operates in the AI hardware space. It produces chips and other data center equipment, which includes industry-leading networking solutions.
Microsoft and Adobe are quickly becoming AI software powerhouses. Microsoft has developed an AI virtual assistant called Copilot and is also a leading provider of AI services to businesses through its Azure cloud platform. Adobe is integrating AI into its flagship products like Photoshop to unlock new features and automate workflows.
Outside its top five positions, the Vanguard ETF holds several other leading AI stocks, including Advanced Micro Devices, Oracle, Micron Technology, and more.
The Vanguard ETF is crushing the return of the S&P 500
The Vanguard ETF has delivered a compound annual total return of 13.5% since it was established in 2004, comfortably outpacing the S&P 500, which rose 10.1% per year over the same period.
But thanks to the proliferation of technologies like enterprise software, cloud computing, and AI, the Vanguard ETF has soared at a compound annual rate of 20.7% over the last 10 years. That created an even wider gap over the S&P 500, which grew at an annual rate of 13.2% over that stretch.
It’s unsustainable for any fund to return more than 20% per year over the long term. However, Nvidia CEO Jensen Huang thinks data center operators will spend $1 trillion building AI infrastructure over the next five years, which will be a big tailwind for the semiconductor sector. Since that’s the largest component of the Vanguard ETF, that trend could drive outsized returns for the foreseeable future.
Plus, several Wall Street forecasts suggest AI will add trillions of dollars to the global economy in the coming decade. That suggests tech stocks will continue to lead the S&P 500 higher, making the Vanguard ETF a great place to invest.
But even if the ETF’s returns fall back to a level more in line with its historical average of 13.5%, it should still be enough to match or outperform the S&P 500 over the long term.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Advanced Micro Devices, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Oracle. 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.
1 Unstoppable Vanguard ETF to Buy During the S&P 500 Bull Market was originally published by The Motley Fool
