HomeMarket NewsIs Vanguard Information Technology Index Fund ETF a Millionaire Maker?

Is Vanguard Information Technology Index Fund ETF a Millionaire Maker?

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Vanguard Information Technology Index Fund ETF (NYSEMKT: VGT) has risen around 35% over the past year versus a roughly 27% gain for the S&P 500 index. The spread between the two gets even wider as you go back three, five, and 10 years. Is this the exchange-traded fund (ETF) you need to reach millionaire status? Maybe, but go in recognizing the risks.

What does Vanguard Information Technology Index Fund ETF do?

As Vanguard Information Technology Index Fund ETF’s name implies, it is an index fund. So it tracks a rote list of stocks that are in the index it follows, which is the MSCI US Investable Market Information Technology 25/50 Index. The index invests in three broad technology segments: internet services and infrastructure companies; information technology consulting and services, and technology hardware and equipment companies; and semiconductor and semiconductor equipment manufacturer companies.

An image of a rocket ship jumping up stairs.

Image source: Getty Images.

There’s a lot that falls under those three headings, but a big-picture breakdown of the fund’s portfolio shows there’s a fair amount of diversification. For starters, the exchange-traded fund owns over 300 stocks. From a sector standpoint, semiconductors account for 27% of assets, systems software 23%, technology hardware 17%, and application software 14%. No other sector makes up more than 5% of assets.

The index Vanguard Information Technology Index Fund ETF follows has the term β€œ25/50” in it, which is a very specific term used by MSCI. According to MSCI, β€œno more than 25% of the value of the RIC’s assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the fund should not exceed 50% of the fund’s total assets.” The point of this is to ensure that no single holding makes up too much of the index.

That said, Microsoft (NASDAQ: MSFT) is 17% of the portfolio, Apple (NASDAQ: AAPL) accounts for 15%, and Nvidia (NASDAQ: NVDA) nearly 12%. While no other stock makes up more than 5% of assets, those three account for a weighty 44%. Given the size of these stocks, it is possible they would be even larger components of the portfolio if the 25/50 rule weren’t in place.

The ETF has an expense ratio of 0.1%, which is fairly low for a pooled investment product. The yield is also fairly low at around 0.7%, but that’s not shocking given that technology stocks often don’t pay dividends at all.

VGT Chart

VGT data by YCharts

Technology is important, but it is also volatile

Once you understand what the Vanguard Information Technology Index Fund ETF does, you have to consider the bigger picture before you add it to your portfolio. Given the past performance, and the importance of technology to the modern world, it seems likely that an investment here will turn out well over the long term. It could easily help you build a million-dollar nest egg.

But look at the price swings in the chart above. The ETF has risen more to the upside, but it has also fallen harder on the downside than the broader market. To put a number on that, Vanguard reports that Vanguard Information Technology Index Fund ETF has a beta of 1.2 times compared to the broad Dow Jones U.S. Total Stock Market Index. Beta is a measure of relative volatility, with 1 indicating the same level and anything above 1 being more volatile. That’s not a small issue. If you can’t stick around during the drawdowns, which are likely to be more severe than the broader market, you won’t be around to benefit from the upside.

SPY Chart

SPY data by YCharts

The story here, though, is fairly simple. This is a technology-focused ETF, which no amount of portfolio diversification can change. Technology has a history of being particularly volatile. Now add to that the fact that three stocks make up roughly 45% of the portfolio and there’s even more volatility risk to consider. If those three stocks, which have been hot lately, start to fall, this ETF is going to go down with them. Pay particular attention to the shocking rise in Nvidia’s shares over the past five years.

Be prepared for volatility

At the end of the day, Vanguard Information Technology Index Fund ETF is not the only investment you should own. It should be part of a larger, more diversified portfolio. If you want to add a little more tech exposure it could be a great fit. But betting the house on this one ETF, while it could make you a millionaire, would probably leave you with sleepless nights and deep drawdowns. Most investors will likely want to use it to spice up a portfolio, not as their entire portfolio.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. 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.

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

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