ETFs
Why the Vanguard Total Stock Market Index Fund ETF is not fit for the AI era
As the development of artificial intelligence (AI) systems continues to advance at a breakneck pace, this emerging technology is poised to disrupt the global economy and transform entire industries. This is a revolution that will certainly create winners and losers: businesses that fail to adapt will be left behind.
Thus, broad-based index funds like Vanguard Total Stock Market Index Fund ETF (NYSEMKT:VTI) may not be the best choice for investors today.
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Disruptive potential and economic impact of AI
AI has the potential to disrupt virtually every economic sector, industry and sub-industry, from healthcare and finance to manufacturing and transportation. As AI-based software systems and robotics become part of everyday life, they will fundamentally change the way businesses operate. Companies that are most successful in leveraging AI to improve efficiency, reduce costs, and create new products and services will likely gain significant competitive advantages.
However, this disruptive potential also presents significant risks for companies that are not suited to this next phase of technological evolution. Businesses in traditional industries such as retail, many forms of insurance, and fossil fuels, for example, may struggle to keep pace with the rapid changes brought about by AI. Many of them risk becoming obsolete, leading to job losses and economic disruption.
Rethinking Diversification: The Limits of Generalized Index Funds in the Age of AI
In light of AI’s transformative potential, investors may need to reconsider their allocations to broad-based index funds like the Vanguard Total Stock Market Index Fund ETF. Although this popular fund offers exposure to more than 3,700 U.S. companies across all economic sectors, it may not be the optimal choice in the age of AI.
On the one hand, the Vanguard Total Stock Market Index Fund ETF is heavily weighted toward information technology stocks: because it is market-cap weighted, eight of its 10 largest holdings are commodity stocks of AI like Microsoft, Nvidia, Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Alphabet.
However, approximately 71% of its remaining holdings are spread across various sectors, some of which could face significant challenges adapting to this new technological landscape.
As technology will dominate most aspects of our daily lives and potentially rebalance the global order, investors may need to rethink the benefits of the broad diversification inherent in funds like the Vanguard Total Stock Market Index Fund ETF.
For what? Although many technology executives and industry experts have publicly warned the world of impending changes over the next two to three years, a sense of disbelief persists among the general population.
The story continues
That sentiment is likely to change this fall with the rollout of OpenAI’s next iteration of ChatGPT, the introduction of Apple Intelligence, and the launch of Amazon’s Alexa Plus. Apple Intelligence, in fact, is likely to be an eye-opening moment for much of the population thanks to the popularity of the company’s iconic iPhone. And the emergence soon after of relatively affordable advanced robotic systems will only add fuel to the fire.
As the AI revolution unfolds, investors may want to take a more targeted approach to portfolio construction, focusing on companies and sectors designed to thrive in this new era. Although broad-based index funds have served investors well in the past, the AI era may warrant greater concentrations in technology and adjacent fields.
Capitalizing on the AI revolution with technology-focused ETFs
Technology-Focused Exchange Traded Funds (ETF) like the Invesco QQQ Trust (NASDAQ: QQQ), the Vanguard Growth ETF (NYSEMKT: VUG), or the Vanguard Information Technology ETF (NYSEMKT:VGT) would be ideal ways to follow this trend.
The Invesco QQQ, which follows the Nasdaq-100 index, provides exposure to many leading technology companies at the forefront of AI.
The Vanguard Growth ETF focuses on large-cap U.S. growth stocks, and its portfolio includes many of these same companies. However, it has a broader asset mix than the Invesco QQQ.
For investors looking for a highly concentrated technology fund, the Vanguard Information Technology ETF may be an attractive option. As of this writing, Microsoft, Apple, and Nvidia represent approximately 46% of its portfolio.
As the AI era unfolds, investors may consider reducing their broad market exposure and increasing their allocations to these and similar technology-focused ETFs. The strong focus of these funds on companies best positioned to benefit from AI makes them attractive in terms of growth and growth. cover vehicles for the coming era of ultra-intelligent machines.
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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. George Budwell has positions at Apple. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, and Vanguard Index Funds-Vanguard Total Stock Market ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Why the Vanguard Total Stock Market Index Fund ETF is not fit for the AI era was originally published by The Motley Fool