The S&P 500(SNPINDEX: ^GSPC) returned 220% over the last decade, compounding at 12.3% annually. That impressive performance was driven in large part by a single stock market sector.
To elaborate, the S&P 500 tracks 500 large U.S. companies, including value stocks and growth stocks from all 11 market sectors, as defined by the Global Industry Classification Standard (GICS). Those GICS stock market sectors are listed alphabetically below.
- Communications services
- Consumer discretionary
- Consumer staples
- Energy
- Financials
- Health care
- Industrials
- Information technology
- Materials
- Real estate
- Utilities
The information technology sector is somewhat unique for two reasons. First, it was the only stock market sector to beat the S&P 500 over the last decade. Second, it was the best-performing stock market sector over the last five, 10, and 20 years.
That information makes a compelling case for buying shares of the Vanguard Information Technology ETF(NYSEMKT: VGT). Indeed, history says the index fund could turn $250 per month into $873,700 over the next three decades. Read on to learn more.
The information technology sector has consistently outperformed the S&P 500
The internet went mainstream in the mid-1990s, laying the foundation for several technologies that have defined subsequent decades. The most impactful include mobile devices, e-commerce, cloud computing, cybersecurity, and software-as-a-service.
Those secular trends have kept the information technology sector ahead of the S&P 500 and the other stock market sectors over the last five, 10, and 20 years, as shown in the chart below.
The chart shows the return in each S&P 500 market sector over the last five, 10, and 20 years as of April 22, 2024.
Going forward, many pundits believe artificial intelligence (AI) will be one of the most impactful technologies in human history. Indeed, former Microsoft CEO Bill Gates wrote the following in his blog last year: "Artificial intelligence is as revolutionary as mobile phones and the internet."
More recently, JPMorgan Chase CEO Jamie Dimon said artificial intelligence could be as transformative as the printing press, steam engine, electricity, computing, and the internet.
Eventually, artificial intelligence will weave its way into most sectors and industries. But technology companies -- think chipmakers, cloud providers, and software vendors -- could be the biggest beneficiaries. In that context, AI could keep the information technology sector ahead of the broader stock market for decades to come.
An index fund that tracks stocks in the information technology sector
The Vanguard Information Technology ETF tracks 313 technology stocks that fall into three categories: (1) software and services companies, (2) technology hardware and equipment providers, and (3) semiconductor and semiconductor equipment manufacturers.
The 10 largest holdings in the Vanguard Information Technology ETF are listed below by weight.
- Microsoft: 18.3%
- Apple: 15.4%
- Nvidia: 11.8%
- Broadcom: 4.2%
- Salesforce: 2.1%
- Advanced Micro Devices: 2.1%
- Adobe: 1.7%
- Accenture: 1.6%
- Oracle: 1.5%
- Cisco Systems: 1.5%
As detailed above, Microsoft and Nvidia together account for 30% of the index fund in terms of weighted exposure. Both technology companies could be major winners as artificial intelligence weaves its way into more business and consumer products.
Indeed, analysts at Morgan Stanley see Microsoft as the software company best positioned to monetize generative AI. Similarly, analysts at Argus recently wrote, "Nvidia stands out, in our view, not only because it participates in so many parts of the dynamic AI economy, but because it has synthesized its offerings into a first-of-its-kind AI-as-a-service delivered through the cloud."
Of course, other technology companies will benefit from artificial intelligence. In fact, many small stocks will probably outperform Microsoft and Nvidia by a wide margin over the long term. In that context, the Vanguard Information Technology ETF is compelling because it lets investors spread money across hundreds of technology stocks.
How the Vanguard Information Technology ETF could turn $250 per month into $873,700
The Vanguard Information Technology ETF returned 1,160% over the last two decades, compounding at 13.5% annually. That period covers a broad enough range of economic conditions that investors can be reasonably confident in similar results (plus or minus a percentage point or two) over the long term.
Going forward, I will assume a slightly more conservative return of 12% annually. At that pace, $250 invested monthly in the Vanguard Information Technology ETF would grow into $57,500 in one decade, $247,300 in two decades, and $873,700 in three decades. However, that potential upside comes with a price.
The Vanguard Information Technology ETF has historically been very volatile. The index fund bears a 10-year beta of 1.15, meaning it moved 115 basis points (1.15 percentage points) for every 100-basis-point movement in the S&P 500 during the last decade. Similar volatility is probable in the future.
The last item of consequence is the expense ratio. The Vanguard Information Technology ETF bears a relatively cheap expense ratio of 0.1%, meaning investors will pay $10 per year for every $10,000 invested in the fund. The average expense ratio on similar funds is 0.98%, according to Vanguard.
Should you invest $1,000 in Vanguard World Fund - Vanguard Information Technology ETF right now?
Before you buy stock in Vanguard World Fund - Vanguard Information Technology ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard World Fund - Vanguard Information Technology ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 22, 2024
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Adobe and Nvidia. The Motley Fool has positions in and recommends Accenture Plc, Adobe, Advanced Micro Devices, Apple, Cisco Systems, JPMorgan Chase, Microsoft, Nvidia, Oracle, and Salesforce. The Motley Fool recommends Broadcom and recommends the following options: long January 2025 $290 calls on Accenture Plc, long January 2026 $395 calls on Microsoft, short January 2025 $310 calls on Accenture Plc, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
