Artificial intelligence (AI) is likely to be a once-in-a-decade opportunity for investors akin to the advent of the internet. The Vanguard Growth ETF (VUG 0.16%) provides heavy exposure to several influential AI stocks, and history says the index fund could turn $500 per month into $474,400 over the next two decades.
Here's what investors should know.
Image source: Getty Images.
The Vanguard Growth ETF provides heavy exposure to the technology sector
The Vanguard Growth ETF tracks the performance of 165 large U.S. companies classified as growth stocks based on revenue, earnings, and return on assets. The exchange-traded fund is most heavily weighted toward the information technology sector, where 62% of its assets are invested.
The 10 largest holdings in the Vanguard Growth ETF are listed by weight below:
- Nvidia: 12.2%
- Microsoft: 11.4%
- Apple: 10.5%
- Alphabet: 6.6%
- Amazon: 6.5%
- Broadcom: 4.4%
- Meta Platforms: 4.3%
- Tesla: 2.8%
- Eli Lilly: 1.9%
- Visa: 1.8%
The investment thesis for the Vanguard Growth ETF centers on its heavy exposure to the technology sector. While concentration creates risk, information technology has been the strongest market sector in recent years and it remains the strongest market sector today, as detailed below:
- Technology companies reported an operating margin of 24% in the second quarter, the best in the S&P 500. The next closest sector was communications services with an operating margin of 22%.
- Technology companies reported earnings growth of 30% in the second quarter, the best in the S&P 500. The next closest sector was communications services, where earnings increased 28%.
- Technology companies are forecast to report trailing-12-month (TTM) earnings growth of 36% during the next year, the best in the S&P 500. The next closest sector is healthcare, where TTM earnings are forecast to increase 24% over the next year.
Notably, the technology sector does have the highest valuation ratio at 40 times earnings, but that multiple is quite reasonable when technology earnings are projected to increase 36% in the next year. Those numbers give a price-to-earnings-to-growth (PEG) ratio of 1.1, and readings around 1 are usually considered cheap.
The Vanguard Growth ETF could turn $500 per month into $474,400 in 20 years
The Vanguard Growth ETF advanced 1,003% in the last two decades, which is equivalent to 12.8% annually. Comparatively, the S&P 500 advanced 694%, which is equivalent to 10.9% annually. The Vanguard Growth ETF beat the broader market due to its heavy exposure to technology stocks, the best-performing market sector during the last 20 years.
Technology companies are well positioned to maintain their momentum as the artificial intelligence (AI) boom continues in the years ahead. Grand View Research says spending across AI hardware, software, and services will increase at 36% annually through 2030.
Also, hedge fund billionaire Philippe Laffont thinks the technology sector will account for 75% of the S&P 500 by 2030, up from 34% today, as companies within the sector profit from AI. He argues no other country in the world has a comparable concentration of world-class universities and engineering talent.
Assuming returns of 12.8% annually, $500 invested monthly in the Vanguard Growth ETF would be worth about $38,700 in five years, $109,400 in one decade, and $474,400 in two decades.
The last thing potential investors should know is the fee structure. The Vanguard Growth ETF has a relatively low expense ratio of 0.04%, meaning shareholders will pay $4 per year on every $10,000 invested in the fund. Comparatively, the average expense ratio across U.S. mutual funds and exchange-traded funds was 0.34% in 2024, according to Morningstar.
