One of the best things to happen to stock investing is the introduction of exchange-traded funds (ETFs). Instead of having to invest in many different stocks to achieve diversification, investors can invest in a single or a few ETFs and instantly be invested in hundreds or thousands of companies.
Leaning on ETFs doesn't have to mean sacrificing return potential, either. There are plenty of ETFs on the market that historically outperform many top companies. One of those is the Vanguard Information Technology ETF (VGT 2.30%). This tech-focused ETF has the potential to turn monthly investments as low as $100 into $500,000 or more.
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This ETF checks off the tech boxes
If you're looking to add tech stocks to your portfolio, this ETF can be a great starting point. It contains over 300 stocks from various industries within the tech sector, including semiconductors (26.8% of the ETF), systems software (21%), technology hardware (18.8%), application software (15.9%), and IT consulting (3.8%).
The tech sector includes many different industries, so the ETF's diversity even within the tech sector gives you broader exposure to its full potential. You don't want to put all your focus on semiconductors and miss the growth of software, put all your focus on hardware and miss the growth of cloud computing, or put all your focus on IT services and miss the growth of cybersecurity.
NYSEMKT: VGT
Key Data Points
How to build a $500,000 portfolio with this ETF
Since its January 2004 inception, this ETF has noticeably outperformed the market (based on S&P 500 returns), up 1,190% compared to 420%. That's an annual average of around 12% versus 8%.
When you look at just the past decade, the ETF's returns have been even more impressive, averaging 19% annual returns.
Averaging 19% and 12% over the long term is an ideal scenario, but it shouldn't be expected. The market historically averaged around 10% annual returns over the long haul, which is a safer expectation.
In either case, here's how much you could earn from this ETF by investing $500 monthly and averaging different returns:
| Years Invested | 10% Average Annual Returns | 12% Average Annual Returns | 19% Average Annual Returns |
|---|---|---|---|
| 15 | $189,200 | $222,000 | $394,500 |
| 20 | $340,100 | $427,800 | $981,700 |
| 25 | $582,100 | $789,000 | $2.37 million |
| 30 | $970,300 | $1.42 million | $5.69 million |
Data source: Calculations by author. Values are rounded down to the nearest hundred and take into account the ETF's expense ratio.
Even if you don't have $500 available to invest monthly, you can still hit the $500,000 mark by only investing $100. What you don't have in money, you can make up with time and taking advantage of the power of compound earnings.
| Years Invested | 10% Average Annual Returns | 12% Average Annual Returns | 19% Average Annual Returns |
|---|---|---|---|
| 15 | $37,800 | $44,400 | $78,900 |
| 20 | $68,000 | $85,500 | $196,300 |
| 25 | $116,400 | $157,800 | $475,500 |
| 30 | $194,000 | $284,500 | $1.13 million |
Data source: Calculations by author. Values are rounded down to the nearest hundred and take into account the ETF's expense ratio.
Past results don't guarantee future performance, so you never want to assume that this ETF (or any stock) will maintain these returns. However, it's positioned to return great long-term value.
This ETF should be a complementary piece to your portfolio
One downside to this ETF is its concentration in Apple, Microsoft, and Nvidia stocks. The three combine to make up over 45% of the ETF. That's a lot for any ETF, but especially one with over 300 companies.
Here are the ETF's top 10 holdings:
| Company | Percentage of the ETF |
|---|---|
| Apple | 17.15% |
| Microsoft | 14.32% |
| Nvidia | 14.20% |
| Broadcom | 4.44% |
| Salesforce | 1.75% |
| Palantir Technologies (Class A) | 1.73% |
| Oracle | 1.59% |
| Cisco Systems | 1.59% |
| IBM | 1.55% |
| ServiceNow | 1.36% |
Data source: Vanguard. Percentages as of April 30.
Granted, Apple, Microsoft, and Nvidia are some of the world's top companies, but that's still a lot riding on just them. Ideally, this ETF would be a complementary piece to your portfolio, rather than the bulk of it. This is especially true for people invested in the S&P 500, because these companies also make up a good portion of the index.
The tech sector as a whole can be volatile, so the same applies to this ETF. The best you can do is expect it, ignore it, stay consistent, and trust the long-term returns.
