“Why This Vanguard ETF is Poised to Outperform the S&P 500 by 2025”

Published On: February 9, 2025 12:57 pm

Tech-Focused Vanguard ETF Outshines S&P 500: A Smart Investment for $1,000?

The S&P 500 (SNPINDEX: ^GSPC) has shown impressive growth, with a rise of approximately 23% in 2024 and over 80% in the last five years. However, many stocks and funds have significantly outperformed the S&P 500 recently.

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No one can predict exactly how the market will behave in 2025. Investments with high potential returns often come with greater short-term volatility. One standout option is the Vanguard Information Technology ETF, which has consistently outperformed the S&P 500 in recent years and may continue to do so this year.

Coin being inserted into a blue piggy bank.

Image source: Getty Images.

Vanguard’s Focus on Technology Stocks

The Vanguard Information Technology ETF (NYSEMKT: VGT) is dedicated exclusively to technology stocks. The three largest holdings, Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA), and Microsoft (NASDAQ: MSFT), account for a significant 44.94% of the total fund. The top 10 stocks make up nearly 60% of the ETF, with the remaining 306 stocks filling out the rest.

This concentration can be both risky and beneficial. While it means less diversification compared to an ETF that includes a variety of industries, it also opens the door to greater returns if these top stocks continue to perform well.

The Role of Emerging Technology

The growth of this ETF can be attributed in part to its focus on artificial intelligence (AI). Nvidia, for instance, is a major supplier of graphics processing units (GPUs) critical for many AI applications.

Recent advancements in AI have driven substantial growth in related stocks. Over the past two years, the Vanguard Information Technology ETF has achieved total returns of nearly 74%, significantly outpacing the S&P 500’s 48% returns during the same period.

^SPX Chart

^SPX data by YCharts

Historically, this ETF has delivered returns above the market average, approximately 13% per year since its launch in 2004, compared to the historical market average of about 10% per year.

Assessing the Risks

In late August, Nvidia faced a dramatic decline due to the introduction of DeepSeek, a Chinese AI chatbot that could challenge established AI players. This event marked the largest single-day sell-off for a stock in U.S. history.

Despite some investors downplaying DeepSeek’s potential impact on Nvidia, this situation underscores the risks associated with investing in cutting-edge technologies. While advancements can lead to significant profits, the risks of sharp declines are also notable.

When considering an ETF investment, especially in technology sectors, it is important to evaluate the potential rewards against the inherent risks. Rapidly emerging competitors and heavy reliance on a few stocks can increase volatility in your investments.

The Vanguard Information Technology ETF has a solid track record of exceeding S&P 500 performance. If AI continues to thrive within the tech sector, further growth for this fund is possible. However, be mindful of your risk tolerance and ensure your portfolio remains well-diversified to safeguard your investments.

Is Vanguard Information Technology ETF a Smart Move for $1,000?

If you’re considering investing in the Vanguard Information Technology ETF, keep this in mind:

The Motley Fool Stock Advisor team has shared their top picks for stocks to watch, and Vanguard Information Technology ETF is not among them. The selected stocks are believed to have strong potential for future gains.

For context, if you had invested $1,000 in Nvidia when it was highlighted on April 15, 2005, that investment would now be worth $795,728!

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Katie Brockman owns shares in the Vanguard Information Technology ETF. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool also recommends different options involving Microsoft. For more detailed disclosures, please refer to their policy.

The views expressed in this article are those of the author and do not necessarily reflect the opinions of Nasdaq, Inc.