It's been a volatile period for growth stocks, especially tech shares that have seen their valuations put to the test this earnings season.
Oracle just hit an all-time high. Nvidia mostly recovered from its sell-off and is now down just 12% from its all-time high. Adobe sold off on earnings but is still up over the last few months. And Salesforce is down around 20% from its all-time high but has also recovered from its lows.
Here's why exchange-traded funds (ETFs) like the Vanguard Information Technology ETF (VGT +1.62%) can be an excellent way to ride the rally in Oracle and buy the dip on Nvidia, Adobe, and Salesforce.
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A results-focused market
Some folks might look at the market rally in 2024, especially since the beginning of 2023, and say that valuations are overextended. But overall, the growth has been impressive, and earnings have been strong enough to support the broader market rally.
Nvidia reported blowout results but fell due to valuation concerns. It has since made up the bulk of that sell-off. Adobe's growth has slowed, and the stock is down year to date despite gains in the major indexes and tech sector. The company has developed impressive new apps and artificial intelligence (AI) tools, but it has yet to monetize these solutions enough to justify higher costs.
Salesforce is also down slightly year to date for reasons similar to Adobe. Its results have failed to impress Wall Street as enterprise software remains a challenging pocket of the tech sector. Unlike Nvidia, which benefits from higher demand for computing power to support AI models, enterprise software companies must justify their AI investments with higher sales and profitability, which hasn't exactly gone smoothly for industry leaders like Adobe and Salesforce.
Meanwhile, Oracle is at the top of its game and continues to see surging cloud revenue. The stock has rocketed over 53% higher in 2024 thanks to strong results, but it's beginning to look expensive. Enthusiasm could lead to stretched valuations. But good-to-excellent results from most top tech companies mean that the rally isn't purely based on euphoria.
Investing in proven winners
Every investor wants a great deal, but timing the market is ultimately a losing battle. Instead of trying to buy the lowest low in a phenomenal company, it's far more impactful to pick the companies that have what it takes to grow well into the future.
Apple and Microsoft, the two largest companies by market capitalization, are perfect examples of why timing the market is overrated. Both companies have been known winners for decades. Yet five years ago, Apple and Microsoft had around $1 trillion market caps. Today, they are each worth over $3.2 trillion.
So buying either stock at an all-time high five years ago would have still more than tripled your money. And there's reason to believe both are still good buys now because they allocate capital well and have a clear runway for returning value to shareholders by growing the core business, buying back stock, and raising their dividends.
Building a diversified basket of tech stocks
Buying a fund like the Vanguard Information Technology ETF is a simple yet effective way to invest in the broader tech sector. Instead of overly focusing on which stocks have sold off or which ones are in favor, the ETF offers a way to take a step back and look at the big picture.
The tech sector includes a variety of industries, including hardware and software companies, designers and makers of semiconductors, electronic component companies, and more. Buying the Vanguard Information Technology ETF is a bet that the sector will continue leading the broader market higher and that tech companies will be able to back up their premium valuations with future earnings growth.
The ETF features a price-to-earnings ratio (P/E) of 42.2 and a dividend yield of just 0.6%, so it's not a good fit if you're looking for value or passive income. The fund contains 318 stocks, with exposure to top names like Apple, Microsoft, Nvidia, Broadcom, Salesforce, Adobe, Advanced Micro Devices, Oracle, Qualcomm, and more. It has a minimum investment of just $1 and an expense ratio of 0.1% -- or $1 for every $1,000 invested.
Approaching the tech sector with the right mindset
The tech sector makes up 31% of the S&P 500 and has been the driving force behind the bull market for over a decade. Buying tech stocks requires the acceptance that you aren't getting a good deal based on traditional valuation metrics like the P/E ratio. It also demands patience, a high risk tolerance, and an ability to hold through periods of volatility, since the sector can suffer severe drawdowns in a matter of months.
If those factors sound acceptable, then the Vanguard Information Technology ETF could be a great way to buy and hold many top tech stocks and let exciting growth themes play out over the long term.
