Vanguard Information Technology ETF (VGT +1.31%) invests in what its name implies: tech stocks. And right now, there's a small number of technology companies that are driving the market, with three of the most important being Nvidia (NVDA +1.06%), Apple (AAPL +0.38%), and Microsoft (MSFT 0.02%).
These three tech giants make up just over 43% of Vanguard Information Technology ETF, but there's so much more to understand about this exchange-traded fund (ETF).
What does Vanguard Information Technology ETF do?
Technically speaking, Vanguard Information Technology ETF doesn't really do anything because it is a passively managed index tracking exchange-traded fund. So the real question is what index does it track and what does that index do? In this case, the index is the MSCI US Investable Market Information Technology 25/50 Index. The index tracks U.S. technology stocks.
Image source: Getty Images.
But what does the 25/50 in the index name mean? This is where things start to get really interesting because the index is specifically designed to enhance diversification. According to MSCI, "no more than 25% of the value of the RIC's assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the fund should not exceed 50% of the fund's total assets."
This is a magnificent little adjustment, particularly when you are dealing with an industry-specific investment approach. It isn't at all uncommon for some industries to be dominated by a small number of companies. In the technology sector, the big names right now are Nvidia, Apple, and Microsoft. As noted, they make up a huge 43% of Vanguard Information Technology ETF. That's less than 50%, per the guidelines for the index. And the fourth-largest holding makes up less than 5% of the portfolio, also per the guidelines.
You are getting so much more than you think
There is no way to sugarcoat what to expect with Vanguard Information Technology ETF. The three largest holdings are going to have a huge impact on the ETF's performance. Hard stop. If that isn't what you want, you should look for another technology ETF. But the truth is, these three tech stocks are, in fact, the most important ones right now and they make up a large portion of any index they are in. For example, they make up just over 21% of the S&P 500 (SNPINDEX: ^GSPC).
What's notable with the S&P 500 index, however, is that there are another 497 or so stocks in the portfolio. Vanguard Information Technology ETF doesn't quite have that many stocks, but, inclusive of Nvidia, Apple, and Microsoft, the portfolio has 314 stocks in it. You are getting far more than just those three industry-leading giants. And while the portfolio leans heavily toward just those three stocks, it is market cap-weighted, with some modifications given the 25/50 approach, so the rest of the portfolio is extremely well diversified.
NYSEMKT: VGT
Key Data Points
All in, it's a reasonable balance between the reality of what is happening in the technology sector (a small number of big companies are driving the sector) and the diversification that investors should be looking to achieve. The cost for the balance is an expense ratio of just 0.09%, which is entirely reasonable.
Performance-wise, the ETF has been doing quite well lately. That makes sense given that Nvidia, Apple, and Microsoft have been leading the market higher. But the real reason to buy Vanguard Information Technology ETF is that it provides exposure to the technology sector in a way that is specifically focused on providing diversification.
Who should buy Vanguard Information Technology ETF?
You should only buy Vanguard Information Technology ETF if you are looking for an investment that is focused on technology stocks. That should be kind of obvious. However, if that is what you want, it would be a good selection for most tech lovers because of the diversification guardrails it places on the portfolio. You'll get material exposure to the most important companies, but you'll also get exposure to the rest of the sector, too. And you get all of that at a very low cost.
