Investors who doubled up on top growth stocks during the rapid sell-off in April were handsomely rewarded -- as the broader indexes are now hovering around all-time highs. But long-term investors know that the truly massive gains aren't made by timing the market or being fortunate enough to put capital to work during a sell-off. Rather, the rewards come from holding shares in excellent companies or exchange-traded funds (ETFs) long-term and letting those investments compound over time.
Despite making new highs, there are still plenty of top tech stocks worth buying now for patient investors. Technology is the highest-weighted sector in the S&P 500 (^GSPC 0.83%) -- making up nearly a third of the index. The Vanguard Information Technology ETF (VGT 1.38%) closely tracks this sector and charges a mere 0.09% expense ratio, or $9 for every $10,000 invested.
Here's why the fund could still be worth buying now, as well as factors that could make it a poor choice for some investors.
Image source: Getty Images.
Leading from the top
Ten years ago, Apple and Microsoft had a combined market cap of around $1.1 trillion, and Nvidia was a mere $11 billion company. Today, each of these tech companies has a market cap over $3 trillion -- and over $10.3 trillion combined.
Data by YCharts
Put another way, these three companies have added around $9 trillion in market cap to the S&P 500 in the last decade, while the S&P 500 has added just over $29 trillion. That means Nvidia, Microsoft, and Apple have contributed roughly a third of the gains in the index in the last 10 years.
Understanding just how vital these names have been to broader market returns illustrates the impact of asymmetric gains. Today, Nvidia, Microsoft, and Apple make up 18.6% of the Vanguard S&P 500 ETF -- which tracks the index -- and 45.7% in the Vanguard Information Technology ETF. So, if you want outsized exposure to these three companies, the tech sector may pique your interest.
It's worth mentioning that while Microsoft and Nvidia stocks hover near all-time highs, Apple has been a noticeable laggard -- down close to 20% year to date. Without that underperformance, the ETF would be up even higher.
Data by YCharts.
AI-driven growth potential
Outside of those three top holdings, the tech sector offers far more exposure to software companies and the semiconductor industry than is available from an ETF that mirrors the performance of the S&P 500 or Nasdaq Composite (^IXIC 1.02%). In fact, semiconductors make up 28.8% of the Vanguard Tech ETF -- led by Nvidia's 14.2% weighting and Broadcom's 4.5% weighting.
Perhaps the most attractive quality of the tech sector is its diversified exposure to artificial intelligence (AI). Chip companies provide the computing power needed to handle increasingly complex AI models. Software companies like Salesforce are using AI to enhance their services through AI agents and other tools. Similarly, Microsoft has integrated AI tools through Copilots across its Microsoft 365 suite, as well as other platforms like GitHub for developers.
Microsoft Azure is the No. 2 cloud computing service behind Amazon Web Services. However, it's worth noting that Amazon and Google Cloud parent company, Alphabet, are not in the Vanguard tech ETF because Amazon is in the Vanguard Consumer Discretionary ETF, and Alphabet is in the Vanguard Communications ETF.
Many legacy tech companies that spent years underperforming the major benchmarks are undergoing resurgences thanks to AI. International Business Machines, Cisco Systems, and Oracle are examples of veteran tech companies that participate in the AI ecosystem through cloud, hardware, and/or software offerings.
In sum, there are many phenomenal growth companies in the tech sector outside of the big three players. However, these companies make up a fraction of the S&P 500 index funds. So, buying directly into the tech sector is a good way to increase the impact of the companies in your portfolio.
Big gains, big expectations
The Vanguard Tech sector ETF can be an excellent tool for getting exposure to Nvidia, Microsoft, Apple, and hundreds of other tech companies. But before diving headfirst into the ETF, it's worth considering how the holdings will fit into your existing portfolio and if they match your risk tolerance.
For example, if you already have a sizable position in one or more of those big three top holdings, then buying the Vanguard Tech ETF may be adding more exposure than you intended. Or if you hold growth-focused ETFs or even an S&P 500 ETF, then you already indirectly own many of the stocks in the Vanguard Tech ETF.
So, if you're looking to invest more capital in tech stocks and are OK with boosting your exposure to existing holdings, the Vanguard Tech ETF could be a good idea.
Another factor to consider is risk tolerance. Tech has dominated the broader market in recent years, which has inflated the valuations of many tech companies. To justify those valuations, earnings have to continue growing at impressive rates. Nvidia is a textbook example. The stock has skyrocketed to new highs, but so have the company's earnings. Over the last three years, Nvidia's stock price has jumped 835% -- but earnings are up 916% thanks to data center demand. So Nvidia's valuation has remained reasonable because it has sustained earnings growth. But the stock could look expensive if that growth cools off, even for factors outside of the company's control.
Be mindful of maintaining diversification
The tech sector can be highly volatile due to its cyclical nature and valuations based on future growth projections. The Vanguard Tech ETF is only worth considering if you're OK with these risks and how the ETF would fit into your existing portfolio.
It may seem counterintuitive to buy stocks or an ETF that has increased so quickly. But the best companies grow into their valuations over time, and the tech sector is full of top companies.
All told, the Vanguard Tech ETF may be worth a closer look in July. Another option is to scan the fund's holdings and select individual companies you don't own and want to build a position in. That way, you aren't putting an uncomfortable amount of money into existing holdings.
