The S&P 500 sits about 9% below its all-time high at the moment, meaning the index is 9 percentage points away from bull market territory by the most conservative definition. That threshold is worth highlighting because the S&P 500 returned an average of 186% during the last nine bull markets, and many stocks will undoubtedly soar during the next one. And history says there will be a next one.
The S&P 500 covers 11 stock market sectors, as defined by the Global Industry Classification Standard, and the information technology sector consistently outperforms the others over long periods of time. Investors can spread capital across that sector by purchasing the Vanguard Information Technology ETF (VGT 0.36%), and doing so could turn $500 per month into $1 million (or more).
NYSEMKT: VGT
Key Data Points
The Vanguard Information Technology ETF
The Vanguard Information Technology ETF tracks 319 U.S. stocks, the vast majority of which belong to the information technology sector. Its constituents generally fall into three categories: hardware and equipment providers like Apple and Cisco Systems, software and services vendors like Microsoft and Adobe, and semiconductor and semiconductor equipment manufacturers like Nvidia and Broadcom. Indeed, those six stocks are the six largest holdings in the index fund.
The Vanguard Information Technology ETF has returned 899% since its inception on Jan. 26, 2004, or 12.4% annually. That easily tops the 459% return in the S&P 500 over the same period. I expect that outperformance to continue in the future, but I will assume a slightly more conservative return of 12% annually. At that pace, $500 invested monthly in the index fund would be worth $111,000 after one decade, $455,600 after two decades, and $1.5 million after three decades.
That means investors can build a million-dollar portfolio (or even a multimillion-dollar portfolio) by regularly buying shares of the Vanguard Information Technology ETF and patiently holding those shares for decades. The chart below details how different monthly contribution amounts would grow over time, assuming a return of 12% annually.
|
Holding Period |
$200 Per Month |
$400 Per Month |
$800 Per Month |
|---|---|---|---|
|
10 Years |
$44,400 |
$88,800 |
$177,500 |
|
20 Years |
$182,200 |
$364,500 |
$729,000 |
|
30 Years |
$610,400 |
$1.2 million |
$2.4 million |
Calculations by author.
As a caveat, returns of 12% annually may be unsustainable over three decades. But the information technology sector has beaten the S&P 500 over the last 5-year, 10-year, 15-year, and 20-year periods. In fact, it was the best-performing of all 11 market sectors during each of those periods. So investors can reasonably assume the Vanguard Information Technology ETF will continue to outperform the broader market in the future.
Why now is a good time to buy the Vanguard Information Technology ETF
Many technology stocks have fallen precipitously over the past two years, dragged down by recession fears triggered by scorching inflation and rising interest rates. Indeed, the Vanguard Information Technology ETF is currently 9% below its all-time high. But patient investors should consider that drawdown as a buying opportunity. The next bull market promises to send stocks much higher, and the information technology sector has historically performed very well during bull market rallies.
Additionally, consider the following commentary from Wedbush analysts: "Our view of tech stocks is that the transformational growth around AI, cloud, cybersecurity, and rebound of digital ad dollars will create a springboard for growth into 2024 that is currently being underappreciated by the Street."
Here's the bottom line: The Vanguard Information Technology ETF bears a below-average expense ratio of 0.1%, meaning the annual fee on a $5,000 portfolio would total just $5, and its track record for outperformance makes it a compelling buy for risk-tolerant investors willing to hold the index fund for decades.
