Exchange-traded funds (ETFs) are attractive options for investors because they can often be much safer options than individual stocks. And for investors who want a simplified investment strategy, they can be practical options to hang on to for the long term.
But that doesn't mean you can't also generate a great return from ETFs. One fund that has risen by around 160% since 2020 is the Vanguard Information Technology Index Fund ETF (VGT +1.85%). It has been a stellar option for growth investors to pile money into in recent years. And the good news? It can still go higher.
VGT Total Return Level data by YCharts
Focusing on big tech has yielded big gains for investors
The Vanguard Information Technology ETF has soundly outperformed the S&P 500 over the past five years due to its focus on tech, and some of the best growth stocks in the world. The fund is heavily tilted toward tech giants Apple, Nvidia, and Microsoft, which together make up 45% of the ETF's overall portfolio. There are more than 300 stocks in the fund in total, but those three are far and away its largest holdings. The next largest position is in Broadcom, which accounts for roughly 6% of the fund's portfolio.
Given the massive growth in artificial intelligence (AI) in recent years and with these companies all being big beneficiaries from those opportunities, it's little surprise the fund has performed as well as it has.
Such significant exposure to just a few stocks could make the fund vulnerable if there's a correction in their valuations. But these companies are also leaders in the tech sector, and their performances will likely dictate how other tech socks perform. It's due to their massive size (aside from Broadcom, their market valuations are all around $3 trillion) that they take up such large positions in the fund. And that's why for tech investors, significant exposure to these tech giants may not necessarily be a big problem.
Why the tech rally may not be over
There's growing controversy these days whether spending on AI will slow down, amid news that a Chinese AI company, DeepSeek, has been able to make an AI model that is comparable to ChatGPT, but cost significantly less to develop. But while that might give businesses second thoughts about how they are spending on tech, there's still a significant need for companies involved with AI to upgrade their infrastructure in the years ahead.
Global market intelligence company International Data Corporation projects that spending on AI will grow at an annual rate of 29%, and that the market will be worth $632 billion by 2028. As AI tools become more prevalent, there will be fewer barriers, enabling more businesses to leverage AI to their advantage. While the big tech giants may indeed scale back some spending, smaller companies could collectively make up for any decline.
With the AI boom still not over, the Vanguard ETF can have much more upside in the future.
Is the Vanguard Information Technology ETF a good option for your portfolio?
A recent sell-off in tech is a reminder of how volatile it can be to invest in tech stocks. If you're close to retirement or think you may need access to your funds within the next five years, this ETF may not be a good fit for your portfolio.
However, if you're OK with the volatility and can stomach a tough year or two should there be a correction due to high valuations, then this Vanguard ETF can remain a good investment to hold in your portfolio. The tech sector remains flush with growth opportunities due to AI, and investing in this ETF is a great way to take advantage of them.
