The S&P 500 (^GSPC 0.38%) has performed remarkably well in recent years, soaring by around 23% in 2024 alone and by more than 80% over the past five years.
But as strong as those figures are, plenty of stocks and funds have crushed the S&P 500 lately.
There's no way to know for certain how the market will perform in 2025, and higher-risk, higher-reward types of investments can often experience increased volatility in the short term. But there's one powerhouse Vanguard ETF that has outpaced the S&P 500 in recent years, and there's reason to believe it might continue that trend this year.
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A supercharged tech ETF
The Vanguard Information Technology ETF (VGT 0.06%) is a fund solely dedicated to tech stocks. Apple (AAPL 0.04%), Nvidia (NVDA +1.80%), and Microsoft (MSFT +1.69%) are the three most heavily weighted stocks in this ETF, making up a combined 44.94% of the entire fund. The top 10 holdings overall comprise close to 60% of the entire ETF, with the remaining 306 stocks rounding out the other 40%.
An ETF that's so heavily weighted toward a handful of stocks can be both a risk and an advantage. On one hand, it offers much less diversification than an ETF that's more evenly spread across a wide variety of stocks from multiple industries -- increasing risk. That said, if these stocks continue their winning streak, you could see serious returns.
Emerging tech has fueled this ETF's growth
Many of this ETF's top holdings are heavily focused on advancements in artificial intelligence (AI). Nvidia, for example, is a key supplier of the graphics processing units (GPUs) used by many AI developers.
With AI exploding in recent years, stocks with a heavy focus on the technology have surged along with them. The Vanguard Information Technology ETF has earned total returns of close to 74% over the last two years, compared to the S&P 500's total returns of 48% in that time.
But it's not just recent developments in tech that have propelled this fund further. The Vanguard Information Technology ETF has a long history of earning above-average returns, with an average return of more than 13% per year since its inception in 2004 -- higher than the market's historic average of around 10% per year.
While there are no guarantees that big tech stocks will continue thriving in the coming years, this ETF has a decades-long history of outperforming the market.
One big risk to consider
Late last month, Nvidia experienced a historic fall after the emergence of DeepSeek, a Chinese AI chatbot that could pose a competitive threat to other companies heavily centered around AI technology. The sharp decline made history as the largest single-day sell-off for an individual stock in U.S. market history.
While many investors are not overly concerned about DeepSeek or its role in Nvidia's future, the sell-off highlights the risk of investing in emerging technologies. While it can fuel supercharged earnings, the downturns can also be brutal.
Before you invest in any ETF, it's wise to weigh the risks versus the rewards. This is especially true when buying tech funds, as there are more risks to consider. New competitors can pop up quickly, and if your investment is heavily focused on a few stocks, you could see significant volatility if those stocks can't keep up with industry trends.
The Vanguard Information Technology ETF has a long history of beating the S&P 500, and if AI continues its dominance in the tech sector, this fund could be poised for even more growth. Just consider your risk tolerance before you buy, and double-check that the rest of your portfolio is well-diversified to protect your money as much as possible.
