The S&P 500(SNPINDEX: ^GSPC) is up 24% this year, which is more than double its average annual return going back to when it was established in 1957. However, the index is in sell-off mode right now with a decline of around 3.4% from its recent record high.
Investors are digesting a new forecast from the Federal Reserve for 2025, which points to fewer interest rate cuts than expected. Plus, there is lots of policy uncertainty from the incoming Trump administration, which takes office on Jan. 20. However, history suggests the S&P 500 always climbs to new highs over the long term, so this dip is likely to be a buying opportunity.
Since the technology sector led the S&P higher this year thanks to themes like artificial intelligence (AI), that might be a great place for investors to find value. Buying an exchange-traded fund (ETF) with a high concentration of tech stocks might be a better move than picking individual names, because its relative diversification can insulate investors from some of the recent volatility.
The Vanguard Information Technology ETF(NYSEMKT: VGT) holds almost every major tech stock at the forefront of the AI revolution. Here's why investors with a spare $630 might want to buy one share in this fund during the S&P 500 sell-off.
Image source: Getty Images.
Hardware, software, and AI stocks packaged into one ETF
The Vanguard Information Technology ETF holds 316 stocks from 12 different segments of the technology industry. The semiconductor segment is the largest, with a weighting of 28.7%, thanks to surging demand for AI data center chips.
Despite holding hundreds of different stocks, this Vanguard ETF is quite concentrated because its top 10 positions account for 58% of the total value of its entire portfolio. That list includes Nvidia, along with several other top AI stocks many investors want to own:
Stock
Vanguard ETF Portfolio Weighting
1. Apple
16.19%
2. Nvidia
15.42%
3. Microsoft
13.05%
4. Broadcom
4.08%
5. Salesforce
1.89%
6. Oracle
1.84%
7. Cisco Systems
1.44%
8. Adobe
1.38%
9. Accenture
1.38%
10. Advanced Micro Devices
1.35%
Data source: Vanguard. Portfolio weightings are accurate as of Nov. 30, 2024, and are subject to change.
There are more than 2.2 billion active Apple devices worldwide, so the company could soon become the largest distributor of AI to consumers. It just launched its Apple Intelligence software for the latest iPhones, iPads, and Mac computers, which introduces several AI-powered writing tools, an AI image generator, and even a smarter version of the Siri voice assistant.
Broadcom supplies AI accelerators (chips) and networking equipment to hyperscale customers, which include tech giants like Alphabet that are building enormous AI data centers. During Broadcom's recent quarter, sales of its AI accelerators doubled year over year. Its AI connectivity revenue also soared fourfold thanks to huge demand for its data center switches, which regulate how fast information travels between chips and devices.
Then there is Oracle, which I think is one of the most interesting AI opportunities right now. Using Nvidia's chips, it's building some of the fastest data centers in the world for developing AI, and demand is soaring from leading start-ups like OpenAI, Cohere, and xAI. Oracle operates around 98 data centers today, but it plans to grow its footprint to as many as 2,000 over the long term, so its business could grow substantially from here.
Outside of its top 10 positions, the Vanguard ETF holds a number of other popular AI stocks like Palantir Technologies. It also owns numerous stocks at the intersection of AI and other industries like cybersecurity and cloud computing, including Palo Alto Networks, CrowdStrike, and Datadog.
This Vanguard ETF can help investors beat the S&P 500
The Vanguard Information Technology ETF has delivered a compound annual return of 13.7% since its inception in 2004, comfortably beating the 10.1% average annual gain in the S&P 500 over the same period.
That 3.6 percentage-point difference might not sound like much, but it makes a massive impact in dollar terms thanks to the magic of compounding:
Starting Balance (2004)
Compound Annual Return
Balance Today (2024)
$100,000
13.7% (Vanguard ETF)
$1,303,794
$100,000
10.1% (S&P 500)
$685,088
Calculations by author.
And it gets better. The Vanguard ETF soared by an average of 20.6% per year over the last decade thanks to accelerating adoption of technologies like cloud computing, enterprise software, and AI. The S&P 500 rose at an annual pace of 13.2% over the same period, so the performance gap widened even further.
Here's the downside: High-flying tech stocks that soar the most when the market is strong tend to fall the most when the market takes a negative turn. That's why the Vanguard ETF fell by 4% between Dec. 16 and Dec. 19 last week, compared to a drop of 3.4% in the S&P 500.
Moreover, if AI fails to live up to the hype, that could trigger a prolonged period of underperformance for this Vanguard ETF relative to the S&P as stocks like Nvidia would lose a significant amount of their value.
Therefore, even though the Vanguard Information Technology ETF has a spectacular track record and is likely to be a great buy during the S&P 500 sell-off, investors should consider only adding it to a balanced portfolio of other funds or individual stocks outside of the tech space.
Should you invest $1,000 in Vanguard World Fund - Vanguard Information Technology ETF right now?
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Suzanne Frey, an executive at Alphabet, is 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 has positions in and recommends Accenture Plc, Adobe, Advanced Micro Devices, Alphabet, Apple, Cisco Systems, CrowdStrike, Datadog, Microsoft, Nvidia, Oracle, Palantir Technologies, and Salesforce. The Motley Fool recommends Broadcom and Palo Alto Networks and recommends the following options: long January 2025 $290 calls on Accenture Plc, long January 2026 $395 calls on Microsoft, short January 2025 $310 calls on Accenture Plc, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
