The S&P 500 (^GSPC -1.39%) is made up of 500 companies from 11 different sectors of the U.S. economy, but the information technology sector is the largest in the index by far, representing 30.1% of its entire value.
That’s partly because it’s home to each of the world’s three biggest companies: Apple, Nvidia, and Microsoft, which have a combined value of $8.9 trillion. They are among several tech powerhouses that have led the S&P 500 higher over the last few years, but with the index currently down 10% from its recent all-time high, now might be a great opportunity to buy them at a discount.
The Vanguard Information Technology ETF (VGT -1.80%) exclusively invests in stocks from the information technology sector, and it has beaten the S&P 500 every year on average since it was established in 2004. Here’s why investors with a spare $550 (money they don’t need for immediate expenses) might want to allocate it to one share of this ETF.
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A slice of the world’s best tech stocks
The Vanguard Information Technology ETF holds 316 stocks from 12 different subsegments of the information technology sector, the largest of which is semiconductors with a weighting of 27%. That makes perfect sense considering Nvidia has added more than $2.2 trillion to its valuation over the last two years on the back of surging sales of its data center chips, which are the most powerful in the industry for developing artificial intelligence (AI) models.
Broadcom is another company from the chip segment. Its stock more than doubled during 2024 alone, thanks to strong demand for its portfolio of AI data center hardware, which includes chips and networking equipment.
This Vanguard ETF is quite top-heavy, with its five largest positions accounting for 50.2% of its total value. However, the list includes a healthy mix of hardware and software giants, each of which is driving the AI boom:
|
Stock |
Vanguard ETF Portfolio Weighting |
|---|---|
|
1. Apple |
16.82% |
|
2. Nvidia |
13.88% |
|
3. Microsoft |
13.33% |
|
4. Broadcom |
4.23% |
|
5. Salesforce |
1.97% |
Data source: Vanguard. Portfolio weightings are accurate as of Jan. 31, 2025, and are subject to change.
Apple has been preparing for the AI revolution for years. It started by designing new chips for its iPhones, iPads, and Mac computers, which are capable of delivering the necessary computing power to handle AI software. Then, it launched Apple Intelligence late last year, which introduced powerful writing tools to help users summarize emails and texts and generate replies, all with a single tap. The software can also manage users’ notifications, and it even provided the Siri voice assistant with its biggest upgrade ever.
Microsoft, on the other hand, developed an AI assistant called Copilot, which is embedded in its popular software applications like Windows, Edge, Bing, and 365 (Word, PowerPoint, and Excel). However, Microsoft also owns the Azure cloud platform, which offers developers the data center infrastructure and ready-made large language models they need to create their own AI software.
Salesforce developed the world’s leading customer relationship management (CRM) platform, which helps businesses store client contact information, track service issues, and identify sales opportunities. There is a layer of the Salesforce platform called Agentforce, where AI-powered virtual agents work autonomously across the CRM platform to help employees manage and accelerate workflows. These AI agents can book appointments and even reach out to sales prospects.
Outside of its top five positions, the Vanguard ETF also holds a number of other popular AI and technology stocks like Oracle, Advanced Micro Devices, Palantir Technologies, CrowdStrike, and more.
The Vanguard ETF has a stellar track record against the S&P 500
The S&P 500 delivered a return of 25% last year (including dividends), but had you invested in the Vanguard Information Technology ETF instead, you would have had a gain of 29.2%. The outperformance was driven by an average return of 69.6% in the ETF’s top five holdings:
But 2024 was just one year in a longer-term trend. The Vanguard ETF has delivered a compound annual return of 13.3% since 2004, comfortably outperforming the average annual gain of 10.3% in the S&P 500 over the same period. I think that will continue in 2025 and beyond, partly because of the sheer strength of emerging trends like AI.
Meta Platforms, Alphabet, Amazon, and Microsoft plan to spend over $300 billion combined on AI data center infrastructure and chips during 2025. A lot of that money will flow to companies in the Vanguard ETF like Nvidia and Broadcom, which will support their earnings and their stock prices.
The Vanguard Information Technology ETF is currently down 15% from its recent peak amid the sell-off in the broader market, so this might be a great opportunity for investors to add it to their portfolio at a discount.
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. Suzanne Frey, an executive at Alphabet, 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, Alphabet, Amazon, Apple, CrowdStrike, Meta Platforms, Microsoft, Nvidia, Oracle, Palantir Technologies, and Salesforce. 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.