The S&P 500 was down by as much as 19% from its all-time high after President Trump announced his "Liberation Day" tariffs on April 2. But it erased those losses since then because several countries have come to the table to negotiate new trade deals and the federal Court of International Trade ruled many of the tariffs were illegal, lowering the odds of an economic downturn.
The S&P 500 is the most diversified of the major U.S. stock market indexes, hosting 500 companies from 11 sectors of the economy. But information technology is the largest sector in the index by far, representing 31.7% of its total market capitalization (value). It's home to the world's three largest companies: Microsoft, Nvidia, and Apple, which are worth a combined $9.85 trillion.
The Vanguard Information Technology ETF(NYSEMKT: VGT) is an exchange-traded fund (ETF) that invests exclusively in information technology stocks. It outperformed the S&P 500 every year, on average, since it was established in 2004, on the back of powerful technological trends like cloud computing, enterprise software, and now artificial intelligence (AI).
Investors can buy one share in the Vanguard Information Technology ETF for around $600, and here's why it might be a good move as the broader market continues to recover.
Image source: Getty Images.
A diverse portfolio of AI companies
The Vanguard Information Technology ETF invests across the entire information technology sector, whether companies are in the S&P 500 or not. As a result, it currently holds 307 stocks spread across 12 subsegments of the sector.
The semiconductor segment has the largest weighting in the ETF at 26.8%, followed by systems software at 21% and technology hardware and storage at 18.8%. Companies like Nvidia and Broadcom are the main reason the semiconductor segment has such a dominant representation. Both companies are leading suppliers of data center chips and components specifically designed for AI development, and they are experiencing more demand than they can possibly meet right now.
As a result, Nvidia stock soared 1,490% over the last five years, catapulting the company to a $3.45 trillion valuation. Broadcom stock is up 726% over the same period, and the company is now worth $1.1 trillion.
But Nvidia, Broadcom, Microsoft, and Apple aren't the only leading AI stocks in the Vanguard ETF. It holds dozens of others that typically receive less attention but are of very high quality, and here are just a few of them:
Stock
Vanguard ETF Portfolio Weighting
Salesforce
1.75%
Palantir Technologies
1.73%
Oracle
1.59%
ServiceNow
1.36%
Adobe
1.14%
Advanced Micro Devices
1.09%
Palo Alto Networks
0.87%
CrowdStrike
0.75%
Micron Technology
0.61%
Snowflake
0.38%
Data source: Vanguard. Portfolio weightings are accurate as of April 30, 2025, and are subject to change.
Salesforce developed the world's most popular customer relationship management (CRM) platform, where businesses can store client data and track sales. But it has a growing portfolio of AI products like Einstein, a powerful virtual assistant that can write sales emails, instantly summarize phone calls with customers, and produce data-driven insights to help employees drive more revenue.
Palantir developed a series of AI-powered software platforms like Foundry, Gotham, and AIP, which help businesses and governments extract more value from their data. Then there is Oracle, which is building some of the most advanced and cost-efficient data centers in the world for developing AI models.
Advanced Micro Devices launched a series of graphics processing units (GPUs) for the data center to compete with Nvidia, and it's having quite a bit of success. Micron, on the other hand, makes memory and storage chips, which are increasingly important for processing AI workloads. In fact, Micron's high-bandwidth memory can be found in Nvidia's most powerful GPUs.
Palo Alto Networks and CrowdStrike are two of the world's biggest cybersecurity companies, and AI is central to almost all of their products. It enables their respective platforms to automate tasks like threat detection and incident response, which reduces the workload on human cybersecurity managers and ensures fewer threats slip through the cracks.
The Vanguard ETF can help investors beat the S&P 500
The Vanguard Information Technology ETF delivered a compound annual return of 12.8% since it was established in 2004, so it has heavily outperformed the S&P 500, which has returned 9.6% per year, on average, over the same period.
That 3.2 percentage point difference might not sound like much at face value, but over a long-term period of 22 years, it would result in double the return in dollar terms thanks to the effects of compounding. I'm not suggesting investors should put all of their eggs in one basket, because the technology sector can be very volatile. However, young investors who can afford to take some risk might benefit from a larger allocation to this high-growth segment of the market, especially as megatrends like AI unfold.
An investor who placed $50,000 in the S&P 500 in 2004 would be sitting on $342,761 today. But had they split that $50,000 equally and placed $25,000 in the S&P 500 and $25,000 in the Vanguard Information Technology ETF, they would have $485,019 today. That's a life-changing difference in potential returns over the long run.
There is a risk that AI fails to live up to the hype, which would dent the valuations of many of the companies in the information technology sector. However, several companies are successfully monetizing AI in its current state already, and its capabilities are only expected to improve from here. As a result, the Vanguard Information Technology ETF might be a great buy right now for long-term investors.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Advanced Micro Devices, Apple, CrowdStrike, Microsoft, Nvidia, Oracle, Palantir Technologies, Salesforce, ServiceNow, and Snowflake. The Motley Fool recommends Broadcom and Palo Alto Networks and 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.
