Vanguard's Tech-Focused ETFs Soar on AI Boom, Outperforming S&P 500

This High-Powered Vanguard Fund Has Generated 160% Returns Since 2020. Here's Why It Can Still Go Higher. | The Motley Fool

Exchange-traded funds (ETFs) are attractive options for investors because they can often be much safer options than individual stocks. And for investors who want a simplified investment strategy, they can be practical options to hang on to for the long term. But that doesn't mean you can't also generate a great return from ETFs. One fund that has risen by around 160% since 2020 is the Vanguard Information Technology Index Fund ETF (VGT -0.53%). It has been a stellar option for growth investors to pile money into in recent years. And the good news? It can still go higher. The Vanguard Information Technology ETF has soundly outperformed the S&P 500 over the past five years due to its focus on tech, and some of the best growth stocks in the world. The fund is heavily tilted toward tech giants Apple, Nvidia, and Microsoft, which together make up 45% of the ETF's overall portfolio. There are more than 300 stocks in the fund in total, but those three are far and away its largest holdings. The next largest position is in Broadcom, which accounts for roughly 6% of the fund's portfolio. Given the massive growth in artificial intelligence (AI) in recent years and with these companies all being big beneficiaries from those opportunities, it's little surprise the fund has performed as well as it has. Such significant exposure to just a few stocks could make the fund vulnerable if there's a correction in their valuations. But these companies are also leaders in the tech sector, and their performances will likely dictate how other tech socks perform. It's due to their massive size (aside from Broadcom, their market valuations are all around $3 trillion) that they take up such large positions in the fund. And that's why for tech investors, significant exposure to these tech giants may not necessarily be a big problem. There's growing controversy these days whether spending on AI will slow down, amid news that a Chinese AI company, DeepSeek, has been able to make an AI model that is comparable to ChatGPT, but cost significantly less to develop. But while that might give businesses second thoughts about how they are spending on tech, there's still a significant need for companies involved with AI to upgrade their infrastructure in the years ahead. Global market intelligence company International Data Corporation projects that spending on AI will grow at an annual rate of 29%, and that the market will be worth $632 billion by 2028. As AI tools become more prevalent, there will be fewer barriers, enabling more businesses to leverage AI to their advantage. While the big tech giants may indeed scale back some spending, smaller companies could collectively make up for any decline. With the AI boom still not over, the Vanguard ETF can have much more upside in the future. A recent sell-off in tech is a reminder of how volatile it can be to invest in tech stocks. If you're close to retirement or think you may need access to your funds within the next five years, this ETF may not be a good fit for your portfolio. However, if you're OK with the volatility and can stomach a tough year or two should there be a correction due to high valuations, then this Vanguard ETF can remain a good investment to hold in your portfolio. The tech sector remains flush with growth opportunities due to AI, and investing in this ETF is a great way to take advantage of them.

Prediction: This Relentless Vanguard ETF Will Crush the S&P 500 (Again) in 2025 | The Motley Fool

This particular exchange-traded fund (ETF) tracks the performance of the S&P 500 Growth index, which holds 208 of the best-performing growth stocks from the regular S&P 500 and ignores the rest. That means it assigns much higher weightings to powerhouse technology stocks like Nvidia, Meta Platforms, Tesla, and more. Last year's performance wasn't a one-off for the Vanguard S&P 500 Growth ETF; it has crushed the S&P 500 every year (on average) since it was established in 2010. With themes like artificial intelligence (AI) driving significant upside in America's largest tech stocks, here's why I predict the ETF will beat the index again in 2025. The S&P 500 Growth index selects its holdings based on factors like their momentum and the sales growth of the underlying companies. That's why Nvidia is the largest position in the Vanguard S&P 500 Growth ETF. Thanks to AI, the company is consistently growing its revenue by triple-digit percentages each quarter, and its stock has rocketed higher by 490% over the last two years alone. In fact, almost all of the top 10 companies in the Vanguard S&P 500 Growth ETF are betting heavily on AI and experiencing strong growth as a result. Those 10 holdings represent 53.9% of the total value of the ETF: Data source: Vanguard. Portfolio weightings are accurate as of Dec. 31, 2024, and are subject to change. Nvidia is the leading supplier of graphics processing units (GPUs) for data centers, which are the key pieces of hardware for developing AI models. And the company intends to dominate many subsegments of AI in the future, including autonomous vehicles and robotics. Microsoft, Amazon, and Alphabet have each developed AI chatbots that are embedded into some of their flagship software products. And they are the three leaders in cloud computing, which is where businesses access the data center computing capacity and ready-made models they need to build their own AI software. Meta Platforms is one of the most interesting AI stories. The company is integrating the technology into its Facebook, Instagram, and WhatsApp social networks. It also developed Llama, which is the most popular family of open-source large language models (LLMs) in the world with over 600 million downloads. Meta will launch Llama 4 this year, which could be as powerful as some of the best closed-source LLMs on the market. Despite being dominated by AI stocks, the Vanguard ETF is somewhat diversified. Sitting just outside its top 10 holdings, investors will find payments giant Visa, Warren Buffett's Berkshire Hathaway, the world's largest investment bank JPMorgan Chase, and retail powerhouses Costco Wholesale and Walmart. The 35.9% return in the Vanguard S&P 500 Growth ETF last year was mostly attributable to its top five holdings, which delivered an average gain of 64%. But as I mentioned at the top, the Vanguard ETF has a great track record against the S&P 500, which began long before AI exploded onto the scene. The ETF has delivered a compound annual return of 16.3% since it was established in 2010, crushing the average annual gain of 14.1% in the S&P over the same period. A difference of 2.2 percentage points might not sound like much at face value, but it makes a big impact in dollar terms thanks to the magic of compounding: Calculations by author. Growth stocks are likely to continue leading the broader market higher in 2025 simply because there isn't another trend quite as powerful as AI right now. According to PwC, the technology could add $15.7 trillion to the global economy by 2030, and a lot of that value is likely to be created by the companies currently dominating the industry. With that said, growth stocks tend to decline very sharply in the event of any economic shock that triggers a broader market correction. There isn't anything of concern on the horizon today, but an event out of left field could push investors into safer value stocks, especially those that pay big dividends. Therefore, absent an unexpected economic shock, I think the Vanguard S&P 500 Growth ETF will crush the S&P 500 yet again in 2025.