Key Points
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The Vanguard Information Technology ETF offers broad exposure to the tech sector.
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The ETF has returned 22% YTD.
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It has long-term returns that beat the Nasdaq and the S&P 500.
Tech stocks have stormed back in recent weeks and have a lot of momentum heading into the summer.
But even as the Nasdaq has rallied, the Vanguard Information Technology ETF (NYSEMKT: VGT) has performed even better. The Vanguard Information Technology ETF is up 22% year-to-date (YTD) and 50% over the past 12 months.
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That’s significantly better than the Nasdaq 100 and the Invesco QQQ (NASDAQ: QQQ), which tracks the Nasdaq 100. The QQQ is up about 17% YTD and roughly 39% over the past year.
Here’s why the Vanguard Information Technology ETF is a great option for investors looking for more heat in their portfolios heading into the summer.
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Broad exposure to tech stocks
The tech stock rally over the past two months has lifted the Nasdaq to an all-time high and it just keeps rising, touching 26,700 on May 14.
While investors should be wary of rising valuations, tech ETFs are a great way to tap into the alpha that the tech sector offers. While a potentially overvalued individual tech stock could be derailed by a macroeconimic or geopolitical shock, an ETF gives you the protection of a diversified portfolio. This way, if one overvalued tech stock stumbles, the damage is limited in a diversified portfolio.
That said, the Vanguard Information Technology ETF is a pure technology stock, unlike the QQQ, which includes the 100 largest non-financial stocks, so it has even more alpha, which has helped lift its return higher than the Nasdaq.
At the same time, the ETF is more diversified within the sector than most tech ETFs. It tracks the performance of the MSCI US Investable Market Information Technology 25/50 Index, which includes large-, mid-, and small-cap tech stocks with certain screens in place to limit the exposure to any one stock.
The VGT holds about 316 tech stocks at present with Nvidia (NASDAQ: NVDA), Apple (NASDAQ: AAPL), and Microsoft (NASDAQ: MSFT) the three largest holdings.
VGT beats the QQQ
There really isn’t a bad time to invest in the tech sector via an ETF. While tech stocks are prone to short-term swings, over the long-term they have outperformed the broader market by a wide margin.
I’ve already laid out VGT’s outperformance YTD and over the past 12 months. It’s the same over the longer term. The VGT has a five-year annualized return of 20.9% and a 10-year return of 24.3%. The Invesco QQQ has annualized returns of 17.6% and 21.2% over those periods, respectively. The S&P 500 lags with five- and 10-year annualized returns of 12.7% and 13.8% respectively.
If you go back 20 years, the VGT has averaged a 15.9% annual return, slightly beating the QQQ’s return of 15.5%. The S&P 500 is further back with a 9.2% average annulaized return over the past 20 years.
So while the wariness about piling into certain tech stocks is understandable, there has almost never been a bad time to invest in the Vanguard Information Technology ETF as a long term holding.
Should you buy stock in Vanguard Information Technology ETF right now?
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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.
