Given the returns on tech stocks over the past decade, it might be easy to assume that the biggest gains have been had and there's little left in the tank. But investors need to assess the environment from this point moving forward. Just because a sector had big returns in the past doesn't mean it can't have big returns in the future.
I believe that's the case with the Vanguard Information Technology ETF (VGT +2.32%). It's averaged a 24.3% annual return over the past 10 years. While it's likely the next 10 years won't produce those kinds of returns, the artificial intelligence (AI) revolution, in its current stage of development, makes a strong case for why VGT could still be the ETF to own for the next decade.
Image source: Getty Images.
AI still makes the tech case compelling
The Vanguard Information Technology ETF holds more than 300 U.S. tech stocks in sectors like semiconductors, software, cloud infrastructure, and IT services. The portfolio is highly concentrated, with the top three holdings being Nvidia, Apple, and Microsoft. Combined, they account for 44% of the fund's assets.
The bull case for VGT is built on earnings growth. Tech earnings are expected to grow by 39% and revenue by 24% in 2026. Capital expenditures on AI development will continue to support the case for tech stocks through 2027 and beyond. The big tech companies are already committing hundreds of billions of dollars to AI development, but the boom is still in its early stages.
All of the AI spending is already producing results, and it's likely to continue well into the future. FactSet estimates that tech sector earnings will grow by 39% and revenue will increase by 24% in 2026. Earnings are expected to grow well into the double digits again in 2027. Growth rates are likely to shrink eventually, but tech stocks are likely to be the major economic growth engine for the next several years.
Short-term sentiment can be influenced by many factors, but long-term performance is usually driven by earnings growth. The tech sector will have plenty of that for years to come. Companies will keep spending on AI for years to come. And valuations have come down quite a bit from their recent peak. It's a compelling investment case on both valuations and growth potential.
VGT: Performance and key metrics
| Metric | VGT |
|---|---|
| Expense ratio | 0.09% |
| Assets under management | $105 billion |
| Dividend yield | 0.4% |
| Year-to-date return | 11.4% |
| 1-year return | 50.7% |
| 3-year annualized return | 30.4% |
| 5-year annualized return | 18.1% |
| Number of holdings | 317 |
Source: Vanguard.
Given how fast the sector is evolving, short-term peaks and valleys should be expected. Volatility will spike at times, potentially shaking out investors with lower risk tolerances. But the long-term buy-and-hold folks are likely to be rewarded.
Despite their rally over the past several years, tech stocks could still be the place to be over the next several years, too.
