The S&P 500 tracks 500 of the largest companies trading on U.S. exchanges. The index includes value stocks and growth stocks from all 11 market sectors, as defined by the Global Industry Classification Standard (GICS), and it covers about 80% of the domestic equities market.

Somewhat surprisingly, only one GICS market sector outperformed the S&P 500 over the last five years. Here's what investors should know.

Technology stocks have consistently beaten the market

Detailed below are the 11 stock market sectors and their returns over the last five years. For context, the S&P 500 returned a total of 70% during that time period.

  1. Information Technology: 160%
  2. Communications Services: 62%
  3. Materials: 60%
  4. Health Care: 55%
  5. Consumer Discretionary: 54%
  6. Energy: 52%
  7. Industrials: 50%
  8. Consumer Staples: 47%
  9. Financials: 35%
  10. Real Estate: 27%
  11. Utilities: 26%

Tech stocks crushed the market, and the same pattern emerged over the past decade. While the S&P 500 delivered a 10-year return of 216%, the information technology sector again more than doubled that gain:

  1. Information Technology: 570%
  2. Health Care: 212%
  3. Consumer Discretionary: 206%
  4. Industrials: 169%
  5. Financials: 155%
  6. Materials: 132%
  7. Consumer Staples: 127%
  8. Utilities: 118%
  9. Communications Services: 109%
  10. Real Estate: 99%
  11. Energy: 63%

Readers should bear in mind that past performance never guarantees future returns. However, the consistent outperformance of this single market sector is still noteworthy. History makes it very clear the information technology sector has the capacity to create immense wealth, so investors who are particularly bullish on technology stocks should consider buying a position in the Vanguard Information Technology ETF (VGT 1.72%).

The Vanguard Information Technology ETF

The Vanguard Information Technology ETF measures the performance of 321 stocks in the GICS information technology sector. Its constituents fall into three broad categories:

  1. Software and services companies
  2. Technology hardware and equipment providers
  3. Semiconductor and semiconductor equipment manufacturers

The five largest holdings in the ETF are:

  1. Apple: 21.8%
  2. Microsoft: 16.5%
  3. Nvidia: 6.5%
  4. Broadcom: 3.3%
  5. Adobe: 2.2%

There are upsides and downsides to any investment, and this index fund is no different. The upside is the historical outperformance and a relatively low expense ratio. Investors who put $10,000 into the Vanguard Information Technology ETF five years ago would have $24,000 today, but investors that put $10,000 into the S&P 500 five years ago would have just $17,000 today. Additionally, the Vanguard index fund bears a below-average expense ratio of 0.1%, meaning the annual fee on a $10,000 portfolio would be just $10.

The downside is volatility and concentration risk. The Vanguard Information Technology ETF allocates nearly 40% of its assets to just two stocks: Apple and Microsoft. That has led to heightened volatility in the past, as evidenced by the five-year beta of 1.16, and it exposes investors to substantial downside risk if either stock underperforms in the future.

That said, Warren Buffett's Berkshire Hathaway had roughly 50% of its $353 billion portfolio in Apple as of the June quarter, so even one of the world's most accomplished investors clearly has high conviction in the consumer electronics company.

When the Vanguard Information Technology ETF makes sense (and when it doesn't)

The Vanguard Information Technology ETF would not be a good choice for investors already heavily exposed to technology stocks, especially those with a significant stake in Apple or Microsoft. But the index fund would be a great option for investors that lack exposure to technology stocks, especially when held alongside an S&P 500 index fund.

Specifically, investors should consider splitting their capital 80/20 between an S&P 500 index fund and the Vanguard Information Technology ETF, respectively. That strategy would lead to outperformance if the information technology sector continued to beat the market, but it would also shield investors from excessive losses if technology stocks happened to underperform over the next decade.

The S&P 500 has returned about 10% annually over the long term, so investors who put most of their money into an S&P 500 index fund can expect similar returns in the future.