Investing in Tech: The Vanguard Mega Cap Growth ETF Offers a Smart Path Forward

The S&P 500 (SNPINDEX: ^GSPC) encompasses 500 companies, but its performance is influenced more by larger firms due to market capitalization weighting. This means that the larger companies within the index, such as Apple, Nvidia, and Microsoft, heavily impact its overall results.

These top three companies alone have a staggering market capitalization of $9.8 trillion, amounting to 19.7% of the S&P 500. Notably, Nvidia saw its stock price soar by 156% in the first half of 2024, contributing one-third of the index’s total 15% gain.

For many investors, not holding shares in these tech giants might mean lagging behind the market. Fortunately, there’s a straightforward way to invest in them without the need to pick individual stocks.

The Vanguard Mega Cap Growth ETF (NYSEMKT: MGK) is an exchange-traded fund (ETF) that offers a focused portfolio of the largest technology stocks, making it a compelling option for those seeking exposure to America’s biggest growth companies.

Image source: Getty Images.

Accessing Top Companies Through a Single ETF

Unlike many ETFs that include hundreds or thousands of stocks, the Vanguard Mega Cap Growth ETF consists of only 71 holdings. This makes it a solid choice for investors who already own stocks but wish to add top growth companies to their portfolios.

Among different economic sectors, technology dominates, making up 61.4% of the ETF’s holdings, thanks to the monumental sizes of firms like Apple, Microsoft, and Nvidia.

The ETF is fairly concentrated in its leading five stocks, as outlined in the table below, which compares their weightings in the Vanguard ETF with their weightings in the S&P 500 index:

Data source: Vanguard. Portfolio weightings are accurate as of Aug. 31, and are subject to change.

While this approach can lead to higher returns when those specific stocks perform well, it also means the Vanguard ETF might struggle during downturns, as it offers less diversification compared to the broader index.

These five companies are pivotal players in the rapidly expanding artificial intelligence (AI) sector. For example, Apple is introducing its Apple Intelligence software, developed with contributions from OpenAI, which could alter how billions of users interact with their devices. With over 2.2 billion active devices worldwide, Apple has the potential to be a major player in AI distribution.

Similarly, Microsoft and Amazon have created AI virtual assistants integrated into their core software products. Their cloud platforms, Microsoft Azure and Amazon Web Services, serve as significant channels for AI technologies, enabling businesses to utilize essential tools and computing resources.

Nvidia leads the AI revolution with its advanced graphics processing units (GPUs). The H100 GPU set standards for AI development last year, and the company is poised to release their new Blackwell-based GPUs, anticipated to revolutionize performance and efficiency.

Moreover, the Vanguard ETF includes well-known large-cap stocks like Eli Lilly, Tesla, Costco Wholesale, and McDonald’s, ensuring that it’s not solely focused on technology.

Vanguard ETF’s Track Record of Outperformance

Since its inception in 2007, the Vanguard ETF has achieved a compound annual return of 13.1%, surpassing the average 10.2% annual return of the S&P 500. Over the last five years, its performance has been even better, with a compound annual return of 20.2%, driven by the swift adoption of technologies like cloud computing and AI that have boosted valuations of companies such as Nvidia, Microsoft, and Amazon. In contrast, the S&P 500 averaged a 16.7% annual gain during the same timeframe.

If technology stocks continue to thrive, the Vanguard ETF is likely to maintain its strong performance relative to the S&P 500, largely due to its substantial tech exposure. Many analysts predict that AI could significantly contribute to the global economy over the next decade, presenting a lucrative investment opportunity in tech stocks.

However, if AI does not meet high expectations, the Vanguard ETF may experience periods of underperformance, especially if names like Nvidia lose value.

This Vanguard ETF is also budget-friendly, boasting an expense ratio of just 0.07%. That’s more than 90% lower than comparable funds, making it an attractive option for investors looking for easy access to larger market returns without the hassle of selecting individual stocks.

Is Now the Right Time to Invest in the Vanguard Mega Cap Growth ETF?

Before purchasing shares in the Vanguard Mega Cap Growth ETF, it’s essential to consider some important factors:

The Motley Fool Stock Advisor analyst team just identified what they consider to be the 10 best stocks for investment right now, and the Vanguard Mega Cap Growth ETF is not one of them. Their top picks may offer tremendous potential returns in the future.

For instance, consider this: if you had invested $1,000 in Nvidia back when it made the list on April 15, 2005, you would have a staggering $826,069 today!*

Stock Advisor provides a roadmap for successful investing, with guidance on portfolio building, consistent analyst updates, and new stock selections each month. Notably, the service has more than quadrupled the returns of the S&P 500 since its inception in 2002.*

View the 10 recommended stocks »

*Stock Advisor returns as of October 7, 2024

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 spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is also a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, Apple, Costco Wholesale, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends options such as long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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