One of Vanguard's most popular exchange-traded funds (ETFs) over the past decade has been the Vanguard Information Technology ETF (VGT 1.63%). As the tech sector's leaders have soared to dominate the list of the world's most valuable companies, the ETF has consistently outperformed the market. In the past decade, it's up by close to 670% compared to the S&P 500's 270% gain.
Much of the Vanguard Information Technology ETF's growth in the past few years can be attributed to the artificial intelligence (AI) boom. Despite this, it might not be a good choice now if you're looking for a fund with wide exposure to AI stocks.
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There are key missing pieces
The Vanguard Information Technology ETF tracks the MSCI US IMI Information Technology 25/50 index, and holds stakes in companies in an array of tech industries ranging from semiconductors to application software to hardware. However, though it currently has positions in 320 companies, nearly 59% of its value comes from the top 10.
| Company | Percentage of the ETF |
|---|---|
| Nvidia | 17.47% |
| Apple | 14.90% |
| Microsoft | 12.19% |
| Broadcom | 4.48% |
| Palantir (Class A) | 1.95% |
| Advanced Micro Devices | 1.70% |
| Oracle | 1.60% |
| Micron Technology | 1.60% |
| Cisco Systems | 1.52% |
| IBM | 1.38% |
Data source: Vanguard. Percentages as of Dec. 31.
Two things stand out when looking at this list. The first is how concentrated the ETF is in Nvidia, Apple, and Microsoft -- nearly 45% of its assets are allocated to those stocks. The second is the companies that are not on the list -- nor even on its complete list of holdings. That latter point is the main reason why the Vanguard Information Technology ETF might not be a good choice for someone wanting to invest in AI stocks.
Yes, its portfolio includes some key companies in the AI ecosystem, but it's also missing important players like Alphabet (GOOG 1.42%)(GOOGL 1.45%), Amazon (AMZN 1.44%), and Meta Platforms (META 2.42%). The reason comes down to sector classifications. The ETF and the index it is based upon only contain companies in the information technology sector. Alphabet, Amazon, and Meta are classified by the gurus of S&P Dow Jones Indices and MSCI into other sectors. Alphabet and Meta land in the communication services sector, while Amazon is in the consumer discretionary sector.
NYSEMKT: VGT
Key Data Points
Why missing those key companies isn't ideal
Amazon and Alphabet are two of the three largest cloud infrastructure providers, with market shares of 29% and 13%, respectively. Without them, the AI industry would be in a very different place, because those hyperscale cloud platforms provide such a large share of the digital storage and computing power needed to train and run AI models.
Meta doesn't have a major cloud platform, nor does it offer a popular consumer AI tool like OpenAI. But when it comes to AI, it's a leader in open-source AI models, and it will be a key player in the evolving use of AI in digital advertising (for better or worse).
An ETF that leaves out all three of those companies just isn't fully exposed to the AI megatrend.
