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The S&P 500 continues to set new record highs, extending the bull market that began when the index bottomed in October 2022. The technology sector is driving the rally thanks to its incredible earnings growth, led by tailwinds like artificial intelligence (AI).
The S&P 500 is weighted by market capitalization, so the largest companies in the index have a greater influence over its performance than the smallest. It’s up 23.8% so far this year, crushing the 14.4% return of S&P 500 Equal Weight index (which assigns the same weighting to every company, regardless of its size).
The difference can be partly explained by Nvidia stock, which has soared 194% this year. Other tech giants have also made a significant contribution to the strong gain in the S&P 500: Oracle stock is up 76%, and Meta Platforms stock has gained 60%.
The AI revolution is still in the very early stages, so tech stocks will probably continue leading the S&P 500 higher. Therefore, buying an exchange-traded fund (ETF) that focuses on the tech sector can help investors beat the market. Here’s why the Vanguard Information Technology ETF (NYSEMKT: VGT) might be a great choice for investors with a spare $605 (that they don’t need for immediate expenses).
Image source: Getty Images.
Top AI hardware and software stocks rolled into a single ETF
The Vanguard Information Technology ETF holds 314 stocks from 12 different sectors of the technology industry. The semiconductor sector is the largest with a weighting of 29.7%, which isn’t a surprise considering the demand for AI data center chips. Nvidia is the dominant player in that space, and it has added $3.1 trillion to its market capitalization over the past two years.
Despite holding hundreds of different stocks, the Vanguard ETF is highly concentrated. Its top three positions alone account for 44.5% of the entire value of its portfolio:
|
Stock |
Vanguard ETF Portfolio Weighting |
|---|---|
|
1. Apple |
15.76% |
|
2. Nvidia |
15.40% |
|
3. Microsoft |
13.35% |
Data source: Vanguard. Portfolio values are accurate as of Oct. 31, 2024, and are subject to change.
Apple recently launched its Apple Intelligence AI software for customers with the latest iPhone, iPad, and Mac devices. It offers new writing tools that allow users to summarize emails and text messages, and it can even draft content for them to send. The software was developed in partnership with OpenAI, so legacy Apple features like the Siri voice assistant are also being overhauled with the capabilities of ChatGPT. These new AI tools could drive a significant upgrade cycle for Apple’s devices over the next few years.
Nvidia’s graphics processors (GPUs) for the data center are the secret behind almost every major AI model developed to date. Demand continues to outstrip supply, and that disparity could widen with the new Blackwell GPUs, which offer a 30-fold leap in performance compared to its flagship H100. Blackwell hardware just started shipping, and Nvidia CEO Jensen Huang says demand is “insane.”
Speaking of which, Microsoft is rumored to be the biggest buyer of Blackwell GPUs so far. It allocated $20 billion to capital expenditures in its recent fiscal 2025 first quarter (ended Sept. 30), most of which went toward AI infrastructure. Microsoft rents the computing power to AI developers through its Azure cloud platform, but it also develops its own AI software like the Copilot virtual assistant.
Outside its top three positions, the Vanguard ETF holds many other popular AI stocks. They include Oracle, Advanced Micro Devices, Palantir Technologies, CrowdStrikeand more.
The Vanguard ETF consistently beats the S&P 500
The Vanguard ETF has delivered a compound annual return of 13.4% since its inception in 2004, which crushes the 10.1% performance of the S&P 500 over the same period.
However, the Vanguard ETF has generated an even more impressive annualized return of 20.3% over the last 10 years, thanks to the widespread adoption of technologies like cloud computing, enterprise software, and AI. The S&P 500 is up by a rate of 13.2% over that time frame.
VGT Total Return Level data by YCharts
AI could drive a continuation of that trend for years to come. Jensen Huang believes data center operators will spend $1 trillion to upgrade their infrastructure with AI GPUs over the next five years, which will buoy the entire semiconductor industry.
Plus, Ark Investment Management founder Cathie Wood thinks AI software companies will generate $8 in revenue for every $1 they spend on chips. That could spell a whopping $8 trillion windfall spread across companies like Microsoft if Huang’s estimate proves accurate.
On the flip side, if AI fails to live up to the hype, stocks like Nvidia could lose an enormous amount of value, which could drive a period of underperformance for the Vanguard ETF. Therefore, it’s best for investors to own this ETF as part of a balanced portfolio of other funds or individual stocks with less exposure to the tech sector.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Apple, CrowdStrike, Meta Platforms, Microsoft, Nvidia, Oracle, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.