The S&P 500 is a market capitalization-weighted index, meaning the largest of its 500 constituents have a greater influence over its performance than the smallest. The index is up 16% this year and it's firmly trading in bull market territory, but a significant portion of that return has come from just a small handful of large-cap technology stocks.
Nvidia stock, for example, is up 154% this year and is responsible for one-third of the entire gain in the S&P 500. In other words, investors who don't have exposure to Nvidia (and other high-flying stocks like Microsoft and Apple) have probably underperformed the index in 2024.
But investors don't have to rush to buy these stocks right now. Instead, it might be better to buy exchange-traded funds (ETFs) that favor the technology sector, because they can offer a diversified way to participate in high-growth trends like artificial intelligence (AI).
Here's why investors sitting on spare cash might want to allocate $950 toward buying one share of the Vanguard Information Technology ETF (NYSEMKT: VGT) and one share of the Vanguard Growth ETF (NYSEMKT: VUG).
1. Vanguard Information Technology ETF
This Vanguard ETF holds 320 stocks that all come from the information technology sector of the economy. It includes 12 different technology segments with semiconductor companies receiving the highest weighting at 29.9%, which isn't a surprise given the surging performance of stocks like Nvidia.
The Vanguard ETF is heavily weighted toward its top five holdings, which account for 53.7% of the value of its entire portfolio. But they also include some of the most popular stocks in the AI space:
Stock | Vanguard ETF Portfolio Weighting |
|---|---|
1. Microsoft | 16.66% |
2. Apple | 16.07% |
3. Nvidia | 14.63% |
4. Broadcom | 4.67% |
5. Advanced Micro Devices | 1.72% |
Data source: Vanguard. Portfolio weightings are accurate as of June 30, 2024, and are subject to change.
Nvidia designs the most powerful data center chips for developing AI models. Surging demand sent the company's data center revenue soaring 427% during the recent fiscal 2025 first quarter (ended April 30). However, Advanced Micro Devices has emerged as a competitor to Nvidia, and it also dominates the semiconductor market for AI-enabled personal computers and devices.
Microsoft and Apple have both partnered with ChatGPT developer OpenAI to create powerful AI software. Microsoft used the start-up's technology to create its Copilot virtual assistant, and Apple used it to develop its new Apple Intelligence software that will launch later this year. With more than 2.2 billion active devices worldwide, Apple could soon become the largest distributor of AI to consumers.
The Vanguard ETF has delivered a blistering compound annual return of 20.8% over the last 10 years, crushing the 13.2% average annual gain in the S&P 500 over the same period. Microsoft, Apple, and Nvidia represent just 20.3% of the S&P 500, so investors are getting a much higher concentration of those top-performing stocks in this Vanguard ETF, which is a key reason for its powerful gains.
Simply put, this ETF is a great addition to any portfolio with little or no exposure to the information technology sector, without having to pick individual winners and losers in fast-moving segments like AI. However, investors should be aware that if AI fails to live up to the hype, a stock like Nvidia will lose some of its recent gains -- and this could drive a period of underperformance for the entire ETF.
2. Vanguard Growth ETF
Investors seeking a more diversified way to invest in technology and AI might want to consider the Vanguard Growth ETF instead, because it holds 188 stocks from 12 different sectors. While technology has a sizable weighting of 60.9% in this fund, the consumer discretionary sector is nicely represented with a weighting of 16.6%, followed by industrials at 7.7%.
The Growth ETF still gives investors a high degree of exposure to leading AI stocks like Microsoft, Apple, and Nvidia, but the composition of its top five holdings is slightly different compared to the Information Technology ETF, and the weightings are smaller:
Stock | Vanguard ETF Portfolio Weighting |
|---|---|
1. Microsoft | 13.02% |
2. Apple | 12.02% |
3. Nvidia | 11.32% |
4. Amazon | 4.95% |
5. Meta Platforms | 4.34% |
Data source: Vanguard. Portfolio weightings are accurate as of June 30, 2024, and are subject to change.
Although technology stocks dominate the above list, pharmaceutical giant Eli Lilly is the eighth-largest holding in this ETF. Its stock is up 87% over the past year, primarily due to the success of its weight loss drugs. Payments powerhouse Visa is also in the top 10, so this fund certainly isn't all about tech.
Outside of its top 10 holdings, investors will also find non-technology stocks like Costco Wholesale, McDonald's, Boeing, and Nike.
But that diversification does have a downside. The ETF has delivered a compound annual return of 15.3% over the last 10 years, and while that beats the average annual gain in the S&P 500, it lags the average annual return in the Information Technology ETF highlighted earlier. Here's how the difference has affected the potential dollar return over the past decade:
Starting Balance (2014) | Compound Annual Return | Balance After 10 Years (2024) |
|---|---|---|
$10,000 | 13.2% (S&P 500) | $34,551 |
$10,000 | 15.3% (Growth ETF) | $41,523 |
$10,000 | 20.8% (Information Technology ETF) | $66,171 |
Calculations by author.
As you can see, a higher exposure to the tech sector led to much better returns, and that trend could persist thanks to AI. But on the flip side, the Growth ETF won't suffer as badly as the Information Technology ETF if the AI trend runs out of steam, thanks to its diversification. Therefore, it could be the ideal choice for investors with a more conservative risk profile.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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 Advanced Micro Devices, Amazon, Apple, Costco Wholesale, Meta Platforms, Microsoft, Nike, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, and Visa. The Motley Fool recommends Broadcom and recommends the following options: long January 2025 $47.50 calls on Nike, long January 2026 $395 calls on Microsoft, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
2 Unstoppable Vanguard ETFs to Buy With $950 During the S&P 500 Bull Market was originally published by The Motley Fool