Nvidia (NASDAQ: NVDA) stock has soared 181% so far in 2024, and its current market capitalization of $3.3 trillion now accounts for 7% of the entire value of the S&P 500. As a result, Nvidia alone is responsible for one-third of the 15.7% gain in the index this year.
Simply put, investors with no exposure to the largest U.S. technology stocks — especially those developing artificial intelligence (AI) — have missed out on significant returns in 2024. Considering Nvidia and its trillion-dollar peers are delivering revenue and earnings growth to justify their soaring stock prices, the tech sector will probably continue leading the S&P 500 higher.
Buying an exchange-traded fund (ETF) is a great way for investors to expose their portfolios to this trend without having to pick individual stocks, and the Vanguard Information Technology ETF (NYSEMKT: VGT) is an excellent option. It’s issued by one of the largest ETF operators in the world, it’s very cheap to own relative to its peers, and it holds the most popular AI stocks.
The Vanguard ETF holds every tech stock investors could want
This ETF holds 321 stocks from different segments of the technology industry. While that sounds diversified, it’s heavily weighted toward its top five positions, which account for 52.6% of the total value of its portfolio. However, that top five includes some of the most elite AI stocks investors could want:
|
Ranking/Stock |
Vanguard Information Technology ETF Portfolio Weighting |
|---|---|
|
1. Microsoft |
16.71% |
|
2. Apple |
15.85% |
|
3. Nvidia |
14.02% |
|
4. Broadcom |
4.17% |
|
5. Advanced Micro Devices |
1.92% |
Data source: Vanguard. Portfolio weightings are accurate as of May 31, 2024, and are subject to change.
Microsoft has ascended to the top of the AI software industry. It invested an additional $10 billion in ChatGPT creator OpenAI early last year, and it used the start-up’s latest GPT-4 models to create an AI assistant called Copilot that is now woven into its most popular products like Windows and 365. Plus, Microsoft’s Azure cloud platform has become an access point for thousands of businesses looking to develop AI applications of their own.
Apple, on the other hand, could become the world’s largest distributor of AI to consumers. It recently unveiled Apple Intelligence (in partnership with OpenAI), which will soon bring AI to its 2.2 billion active devices around the globe, headlined by the flagship iPhone.
But no tech ETF would be complete without Nvidia. Developing the most advanced AI models wouldn’t be possible without its graphics processing units (GPUs) for the data center. The company recently unveiled its new Blackwell GPU architecture, paving the way for chips like the GB200, which will be five times faster than Nvidia’s H100 that already dominates the industry.
Broadcom and Advanced Micro Devices are two more AI hardware plays; Broadcom sells networking hardware for the data center, and AMD recently launched a series of GPUs to compete with Nvidia — plus, it’s dominating another key segment of the AI computing space.
Outside of its top five, the Vanguard ETF holds a number of other important AI infrastructure stocks like Oracle and Micron Technology. However, it also owns shares in successful companies that are now applying AI to improve their existing operations, like CrowdStrike and Datadog.
The Vanguard ETF is crushing the S&P 500, but beware of concentration risk
The Vanguard Information Technology ETF is incredibly cheap to own. It has an expense ratio of just 0.1%, which is the portion of the fund deducted each year to cover management costs. Comparable funds can be nearly 10 times as expensive, which significantly impacts long-term returns.
Speaking of which, the ETF has delivered a compound annual return of 13.2% since it was established in 2004, which is far better than the 9.9% average annual gain in the S&P 500 over the same period.
But thanks to the proliferation of technologies like cloud computing, enterprise software, and AI, the ETF generated a compound annual return of 20.3% over the last 10 years. That crushes the 12.7% annual return in the S&P 500 over the same timeframe, and the difference is staggering in dollar terms:
|
Starting Balance |
Compound Annual Return |
Balance After 10 Years |
|---|---|---|
|
$10,000 |
20.3% for the Vanguard ETF |
$63,482 |
|
$10,000 |
12.7% for the S&P 500 |
$33,055 |
Data source: Calculations by author.
If AI stocks continue to lead the S&P 500 higher, this ETF will almost certainly continue outperforming the index. Global consulting firm PwC thinks AI will add $15.7 trillion to the global economy by 2030, so there could still be a substantial amount of value waiting to be unlocked.
However, if AI fails to live up to the hype for any reason, stocks like Nvidia, Microsoft, and Apple could erase some of their incredible gains from the past year, which will lead to a period of underperformance for the ETF. This is called concentration risk, and it’s something every investor should consider before buying an ETF that is so heavily weighted toward just a few stocks.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, CrowdStrike, Datadog, Microsoft, Nvidia, and Oracle. The Motley Fool recommends Broadcom and 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.
1 Unstoppable Vanguard ETF to Buy With $600 During the S&P 500 Bull Market was originally published by The Motley Fool
