Why the Best ETF Could Be the Ultimate Long-Term Growth Investment

The broad and passive Vanguard Information Technology ETF could be a great way to save time and patience.

2024 has been quite the year on Wall Street so far. After an epic bear market exit, the boom in artificial intelligence (AI) has investors wondering “what’s next.” Remarkably, even if Nvidia (NASDAQ: NVDA) — which remains the barometer of the AI ​​trend — is up more than 80% year to date, with a few companies (like Super microcomputer (NASDAQ: SMCI) and Vertiv Holdings (NYSE: VRT), to name just two) and its results are up even more.

If you’re worried you’ve missed out, but are even more worried (rightly so) about chasing the hottest stocks, there might be a solution. THE Vanguard Information Technology ETF (VGT -0.24%) has a long history of market-crushing performance. Here’s why it could still be the ultimate long-term growth investment.

What exactly is VGT?

This exchange traded fund is passive management weighted by market capitalization basket of technology stocks based in the United States. In simple terms, this means that there is no active management team constantly choosing which stocks to buy and sell at the moment. Vanguard Information Technology ETF. Instead, all stocks classified as technology (as highlighted by the financial data company’s Technology Index) MSCI on which VGT is based) are purchased and allowed to do their job without any alteration.

As a result, the size of a company will dictate the importance of its stock position in the ETF’s portfolio. The larger the company, the larger the allocation. At the end of April 2024, the 10 largest technology companies accounted for almost 60% of the value of the Vanguard Information Technology ETF.

Business

Market capitalization

% of VGT portfolio

Market cap data as of May 15, 2024. Vanguard IT ETF % position as of April 30, 2024. Data source: Vanguard and YCharts.

Note that Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) and Metaplatforms (NASDAQ: META) are not included. They were both reclassified as “communications sector” companies returning in 2018 under the Global Industry Classification Standard (which was developed by MSCI and Standard & Poor’s), and were therefore removed from the technology index. Likewise, Amazon (NASDAQ: AMZN) and You’re here (NASDAQ: TSLA) are not found in its holdings, as they are classified as “discretionary consumption” actions.

Since it is a passive fund, Vanguard charges just 0.1% in annual fees, or just $1 per year in expenses deducted from the fund’s performance for every $1,000 invested in the ETF. This contributed to its outperformance compared to market indices like the S&P500 And Nasdaq Composite.

Data by Y Charts.

A long tail of future market leaders

However, low fees are not the main reason for VGT’s market-overwhelming investment performance. This may look like a simple megatech fund, based on its top 10 holdings. However, the Vanguard Information Technology ETF actually has 312 stocks, including a long list of mid- and small-cap companies.

If you scroll to the last page of VGT’s portfolio, for example, you’ll find three companies with market caps well under $1 billion. One is a developer of LiDAR sensors for autonomous vehicles, one markets an AI chatbot for businesses and the last is a semiconductor design start-up.

Most of these small-cap stocks, which make up an insignificant portion of VGT’s portfolio, will stagnate at best. However, a small handful of them could experience explosive growth. Perhaps one or the other could one day play the role of the “next Nvidia”.

In fact, Nvidia and some of its peers in the semiconductor industry illustrate the beauty of the strategy of representing a large group of small stocks in a portfolio. Ten years ago, Nvidia was only a tiny part of VGT, just like Broadcom and AMD. But thanks to their massive outperformance relative to the market, they joined the fund’s top 10 holdings and helped boost VGT’s performance along the way.

Data by Y Charts.

In the ten years that I have owned shares of the Vanguard IT ETF, my investment has performed quite well. The megacap players that dominate the portfolio today could keep this fund in growth mode for years.

Meanwhile, some of these small businesses trying to innovate now could become the “next big thing,” so those with the patience to buy and hold for years can gain exposure to these future disruptors. I will be happy to hold shares of this ETF for an indefinite period.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Nicolas Rossolillo and its clients hold positions in Advanced Micro Devices, Alphabet, Amazon, Apple, Broadcom, Meta Platforms, Nvidia, Salesforce, Tesla and Vanguard World Fund-Vanguard Information Technology ETF. The Motley Fool holds positions and recommends Accenture Plc, Adobe, Advanced Micro Devices, Alphabet, Amazon, Apple, Cisco Systems, Meta Platforms, Microsoft, Nvidia, Oracle, Salesforce and Tesla. 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.

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