It doesn't take a fancy artificial intelligence (AI) chatbot to figure out which sector has been leading the stock market higher over the past decade. Technology stocks have led virtually every major leg higher, and today, many of these leading tech companies are among the largest in the world.
As such, it probably shouldn't come as too much of a surprise that Vanguard's best-performing exchange-traded fund (ETF) over the past decade is its technology sector-focused ETF: the Vanguard Information Technology ETF (VGT 0.24%). If you invested $10,000 into the ETF 10 years ago and just let it sit, you'd have more than $82,000 today.
Vanguard's tech titan
Like most of Vanguard's ETFs, the Vanguard Information Technology ETF is an index fund and is not actively managed. It tracks the MSCI US Investable Market Information Technology 25/50 Index. The 25 refers to the rule that no single holding can represent more than a 25% weighting in the index, while the 50 refers to the rule that the weights of all stocks that are more than 5% holdings cannot account for more than 50% of the index.
Although these guardrails aim to diversify the index to some degree, the Vanguard Information Technology ETF is still one of the most top-heavy ETFs out there. The ETF holds over 300 tech stocks, but its three largest positions, consisting of Nvidia (NVDA 0.86%), Apple (AAPL 2.04%), and Microsoft, make up nearly 44% of its portfolio. No other holding accounts for more than a 5% position, with Broadcom its fourth-largest holding with a 4.5% weighting.
Nevertheless, the biggest investments in the ETF have directly influenced how well it has performed over the last ten years. Nvidia now accounts for over 17% of the portfolio, as the stock has gained more than 25,000% over the past decade. That's not a typo. Apple, meanwhile, is up over 700% during that stretch, and Microsoft more than 850%. Broadcom hasn't been too shabby, either, up more than 2,600%.
The Vanguard Information Technology ETF's construction, which allows its top holding to continually get larger (within reason), is one of the biggest reasons behind its performance, generating an average annual return of 23.5% over the past 10 years, which not only crushes the 15.3% return of the S&P 500 over the same period, but also any other Vanguard ETF. The next best performing Vanguard fund is the Vanguard Mega Cap Growth ETF (MGK 0.68%), with an average yearly return of 18.9% over the last ten years.
Image source: Getty Images.
Is the ETF still a buy?
Where the ETF goes from here is largely going to be dependent on the stock performance of its top holdings. Nvidia looks like it still has massive growth in front of it, as its graphics processing units (GPUs) are the backbone of the AI infrastructure buildout. Microsoft, meanwhile, has been clicking on all cylinders, as AI is driving both its cloud computing and enterprise software businesses. Apple's AI efforts are somewhat behind the curve, but the company has a massive, affluent customer base it can better leverage to monetize better with AI.
Given the Vanguard Information Technology ETF's heavy concentration around a few stocks, it wouldn't be the only ETF I'd own. However, with AI looking like it is in the early innings, it is certainly one to hold on to.
The key with ETF investing, though, remains dollar-cost averaging. While putting $10,000 into the ETF and just letting it sit would have given you a pretty nice return, if you consistently dollar cost-averaged into the fund, you'd be even better off. For example, if you invested an additional $1,000 each month during that same 10-year stretch, you'd now have around $491,000 in your account. That's how you build real, long-term wealth.
