ETFs
This simple ETF could turn $500 a month into $1 million
The Vanguard Information Technology ETF contains companies that are leading the way in innovation.
The beauty of exchange-traded funds (ETFs) is that they allow investors to cover a lot of ground with a single investment. Although broad-based ETFs typically don’t experience the hypergrowth returns you could get from the stocks of a single outstanding company, some funds have consistently outperformed the market.
If you are looking for a ETFs who has shown he has the potential to create millionaires, consider him Vanguard Information Technology ETF (VGT 2.15%). Since its inception 20 years ago, it has generated an average annual total return of more than 13%. Over the past decade, performance has been even more impressive, with an annualized total return of over 20%.
Past performance is no guarantee of future results, but assuming this trend continues, the ETF could transport investors who have time on their side to the seven-figure promised land.
If we take the middle ground between the ETF’s average returns since its inception and those over the last decade (say, 16% annualized returns), someone investing $500 a month could see the value of their position to break the million-dollar mark in about 23 years. . With a more conservative projection of 13% annualized returns, they could get there in about 26 years.
The only sector that opens the way to the American market
S&P Dow Jones Indices (the joint venture behind the market’s best-known indexes) and MSCI have created a widely used system called the Global Industry Classification Standard, by which they classify all public companies. This system begins by grouping them into 11 major sectors:
- Communications Services
- Discretionary consumption
- Consumer Staples
- Energy
- Financial datas
- Health care
- Industrial
- Computer science
- Materials
- Real estate
- Utilities
Since the inception of the Vanguard Information Technology ETF in January 2004, the information technology sector has significantly outperformed its peers. Here is the performance of the sectors during this period:
There was the tech sector, and then there was everything else, especially over the last decade. These performance differences may not be as pronounced in the future, but the technology sector shows no signs of slowing down, which further strengthens the appeal of the Vanguard Information Technology ETF.
New technological developments should help boost growth
The ETF holds stakes in more than 310 technology companies, ranging from well-established companies blue fries to newcomers looking to revolutionize industries and innovate. This broad range of companies exposes investors to the relative stability of mega-caps as well as the strong growth potential of emerging companies (even though many mega-caps have experienced strong growth in recent years).
Although the ETF is quite large in terms of number of holdings, it is also weighted by market capitalization. Therefore, cutting-edge technology companies account for a large part of its value. As of April 30, here are its top 10 holdings and their share of its holdings:
- Microsoft: 17.28%
- Apple: 15.27%
- Nvidia: 11.89%
- Broadcom: 4.40%
- Selling power: 2%
- Advanced microsystems: 1.96%
- Adobe: 1.60%
- Cisco Systems: 1.46%
- Accenture: 1.44%
- Oracle: 1.44%
It’s not ideal for three companies to account for more than 44% of the value of an ETF with more than 310 constituents, but this concentration reflects the high performance and dominance of these tech giants over the past few years. However, it should be noted that this concentration represents an additional risk. If any of these companies underperformed, it would significantly dampen the ETF’s performance.
The good news, however, is that the ETF’s largest holdings operate in sectors poised for significant growth in the coming years, particularly thanks to advances in AI. With cloud computingcybersecurity, big data, Internet of Thingsand dozens of other technologies, many innovations are underway and should continue to drive the growth of these big names.
One piece of the puzzle for a well-balanced portfolio
No matter how impressive the Vanguard Information Technology ETF’s returns have been (and may continue to be), investors should not forget the importance of diversification. This helps reduce investment risks and can help promote long-term growth.
Concentrating your portfolio in one sector works when that sector is performing well, but the opposite is true when it is experiencing a downturn. Unfortunately, it’s not easy to predict when such declines will occur – and attempting to “time the market” is generally a poor strategy.
The Vanguard Information Technology ETF should be part of a diversified portfolio, but ideally this should not be the bulk of it. Use it to complement a broader ETF (like an S&P 500 index fund) or supplement it with other sector-specific ETFs so you end up with exposure to a larger share of the broader market. Never lose sight of why diversification has stood the test of time as a key pillar of investing.
Steve Walters holds positions at Apple and Microsoft. The Motley Fool holds positions and recommends Accenture Plc, Adobe, Advanced Micro Devices, Apple, Cisco Systems, 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 405 calls $ in January 2026 on Microsoft. The Mad Motley has a disclosure policy.