The technology sector has been on a roll over the past few years, especially as the artificial intelligence (AI) boom has brought many investors into tech companies, hoping to take advantage of the new growth opportunities the technology promises.
With many tech stocks flourishing, tech exchange-traded funds (ETFs) have naturally followed suit. One in particular, the Vanguard Information Technology ETF (VGT +0.43%) is up nearly 21% year to date through November, outpacing the S&P 500 and tech-heavy Nasdaq Composite.
Despite VGT's success through the first 11 months of the year, it's an ETF I would steer clear of this month. Let's take a look at why.
Image source: Getty Images.
Why I'm hesitant about VGT right now
VGT tracks the U.S. information technology sector, containing 314 companies across a range of industries in the sector. The top five industries are semiconductors, systems software, technology hardware, application software, and semiconductor materials and equipment.
A key aspect of VGT is that it's weighted by market cap, meaning larger companies account for a greater share of the ETF than smaller ones. And that brings me to why I'm avoiding VGT in December. The explosion of megacap tech stocks has led a few stocks to account for too much of VGT for my liking.
Below are VGT's top three holdings and how much they account for of the ETF:
| Company | Percentage of VGT | Market Cap |
|---|---|---|
| Nvidia | 18.18% | $4.366 trillion |
| Apple | 14.29% | $4.144 trillion |
| Microsoft | 12.93% | $3.630 trillion |
Data source: Vanguard and Google Finance. Market cap as of 11 a.m. ET on Dec. 1.
There's no doubt that all three of the above companies are world-class. Nvidia has a strong hold on GPUs and other hardware essential to the AI ecosystem, Apple has revolutionized tech hardware as we know it, and Microsoft is the tech Swiss Army knife, with its hands in virtually every tech industry.
That said, having three companies account for over 45% of a 314-stock ETF isn't ideal.
NYSEMKT: VGT
Key Data Points
There are "safer" options to choose from
There are several tech-focused ETFs you can invest in that hold a good amount of Nvidia, Apple, and Microsoft, without being so dependent on their performance. Take the Invesco QQQ Trust ETF, which mirrors the Nasdaq-100, for example. The above three stocks make up about a quarter of the ETF, yet QQQ's performance almost mirrors VGT's so far this year.
High concentration works out in the investor's favor when those companies are flourishing (which they have been), but all it takes is a slump from them to weigh the whole ETF down. With increased uncertainty surrounding the market to begin December, I would prefer not to be so reliant on a few companies.
