Exchange-traded funds (ETFs) have brought a revolution in investing since they first appeared in 1993. They offer an easy way to diversify by allowing investors to buy shares that reflect entire market indexes or sectors. This method reduces the difficulty and risk associated with picking individual stocks while keeping costs low.
The technology sector has been a prime example of the benefits of ETF investing since the financial crisis of 2008. As digital advancements have reshaped communication, work, and daily life, from the emergence of social media to important AI developments, tech-focused ETFs have provided substantial returns and broad exposure to this evolving industry.
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The Vanguard Information Technology ETF (NYSEMKT: VGT) has emerged as a strong choice for investors since its launch in 2004, capitalizing on the tech revolution. The fund not only outpaces the market, but its low expense ratio of 0.10% helps maximize investor returns, especially compared to the industry average of 0.93%.
In 2024, the fund’s impressive performance continued, generating a 29.3% gain for its investors, compared to the S&P 500, which had a total return of 25% (including dividends).
VGT Total Return Level data by YCharts.
Could the popular Vanguard tech ETF continue its impressive run in 2025? Let’s analyze the situation further.
Current Market Trends
As the year began, Wall Street expected a total return of around 10% (including dividends) for the S&P 500. Much has changed since those early predictions, influenced by events such as Trump’s presidency and the rise of DeepSeek in AI. This 10% benchmark helps evaluate the Vanguard Information Technology ETF’s attractiveness for 2025.
Historically, the Vanguard Information Technology ETF has averaged a total annual return of 13.7% since its inception. This suggests it could outperform the S&P 500 again in 2025, but a deeper examination reveals that this year might not follow its usual performance pattern.
Portfolio Structure and Valuation Issues
Examining the fund’s portfolio shows the possibility of a shift in its performance trajectory. Currently, 45% of its assets are invested in three major players: Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA), and Microsoft (NASDAQ: MSFT).
Analysts expect strong revenue growth for Nvidia and Microsoft in 2025; however, their high price-to-earnings (P/E) ratios above 30 suggest that much growth is already priced in. Additionally, Apple’s recent decision to partner with OpenAI to integrate ChatGPT raises questions about its innovative edge. This shift may impact Apple’s reputation in the market.
Given these challenges, the leading companies within the fund may not generate the expected high returns in the short term, adding risk to its performance outlook.
Growth Opportunities and Market Dynamics
The success of DeepSeek’s AI models has led to discussions about the massive investments that U.S. tech companies plan for AI. Although these giants invest heavily in AI, DeepSeek’s advancements question whether such vast spending is necessary.
This scenario spots a crucial change in the AI field. Companies in China have shown the capacity to create effective chatbots without the latest semiconductor technology. However, achieving artificial general intelligence (AGI) relies significantly on specialized AI processors, where Nvidia stands out.
The ongoing development in the U.S. for AGI should continue pushing revenue growth for Microsoft and Nvidia. At the same time, the rapid advancement of AI technology in China creates new competitive and strategic pressures that market leaders need to manage.
Investment Perspective
As it enters 2025, the Vanguard Information Technology ETF faces challenges unlike those in previous years. The growing complexity in the AI landscape, illustrated by Chinese advancements, alters the straightforward growth path the fund has enjoyed since the 2008 financial crisis.
While DeepSeek’s AI capabilities might not surpass innovations from companies like Anthropic, Alphabet, and OpenAI, the quest for AGI will likely keep relying on Nvidia’s advanced processors. Overall, the investment thesis presents more complexity now than in over 15 years, indicating that investors should carefully assess the fund’s risk compared to their investment goals.
A Long-Term Perspective
The Vanguard Information Technology ETF’s long-term growth potential remains strong despite potential short-term issues in 2025. AI signifies a major technological revolution, already impacting various sectors and ways of living.
Expectations suggest AI could create trillions in global economic value by 2030. This significant shift in technology points to potential long-term benefits for the Vanguard Information Technology ETF, despite current uncertainties. With its connection to key players in the AI sector, the fund is positioned well to leverage considerable value in the upcoming decade and beyond.
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Suzanne Frey, an executive at Alphabet, is also a member of The Motley Fool’s board of directors. George Budwell holds stocks in Apple, Microsoft, Nvidia, and the Vanguard Information Technology ETF. The Motley Fool has positions in and recommends Alphabet, Apple, Microsoft, and Nvidia. They also recommend 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.
The views expressed in this article are solely those of the author and do not necessarily represent those of Nasdaq, Inc.
