Consider Upping Your Game beyond the S&P 500 with This ETF Alternative.
The S&P 500 market index isn't problematic in any way. It symbolizes the well-being of the U.S. stock market, employing a quality filter based on market capitalization. Opting for this market monitor through exchange-traded funds (ETFs) such as the SPDR S&P 500 Trust (SPY) grants you immense diversity and prepares you for substantial long-term returns.
If you decided to invest $1,000 in the SPDR fund a decade ago and set up automatic reinvestment of dividends, you'd have $3,500 today. That equates to a compound annual growth rate (CAGR) of 13.2%, surpassing inflation rates. Many investors commence their journey with a popular SPDR 500 fund and preserve their wealth with minimal investor effort for decades.
However, I've got news for you: There are ETFs that deliver superior long-term returns. Take, for instance, the Vanguard Information Technology ETF (VGT). It's one of my beloved ETFs. Let me elaborate how it operates.
Why this Vanguard fund is my preferred ETF for long-term growth
As shown in the graph above, the Vanguard IT ETF has outperformed the S&P 500 and its index trackers for the last decade. The total returns amount to a CAGR of 20.9%. Over this period, a hypothetical $1,000 investment would have amplified to $6,678.
Whose aversion to putting in some extra cash discourages them, let's imagine an automated dollar-cost averaging strategy instead, starting with a mere $100 in the fall of 2014 and adding another $100 to the Vanguard IT ETF position every month. Some investors can implement this as a paycheck deduction, while others may opt for automated transfers, and a few might favor doing it by hand.
No matter the chosen approach, these effortless contributions would sum up to $12,000 over a decade. The investment returns would culminate in roughly $29,000, representing a total investment value of $41,118.
Employing the same methodology with the SPDR S&P 500 fund would yield satisfactory outcomes, too. The same $12,000 investment would be worth $25,174 by now, more than doubling your money in 10 years.
As I mentioned earlier, there's nothing wrong with that. But, I'd opt for the stouter returns from the IT market monitor.
There's no gain without additional risks
Alas, I can't assure market-crushing returns throughout every possible timeframe. The fund underperformed the S&P 500 for its initial five years on the market, nearing the end of the subprime market meltdown in 2008-2009. The inflation crisis of 2022 wasn't a walk in the park for Vanguard IT ETF investors, either.
During such trying market periods, the fund's emphasis on high-growth investment concepts can lead to unfavorable returns. I had to dig deep to find these instances, and this ETF typically surpasses the S&P 500 in prolonged timeframes.
Possibly, this isn't the fund for you if you can't endure occasional price drops. The fund triumphs in most situations, but it can wreak havoc when growth stocks encounter a roadblock.
How this ETF's portfolio differs from the S&P 500
The fund tracks a market index representing all American companies in the information technology sector, resulting in a list of 317 names (as of the latest update).
These names are ranked by market cap, making tech giants such as Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA) the leading holdings today. These three stocks amass to approximately 48% of the entire portfolio.
Needless to say, the same three companies maintain significant influence in the S&P 500, though their combined weight only reaches around 20% at present. The IT index houses several stocks that are too modest for the S&P 500.
In essence, the IT-focused fund loads a greater responsibility upon the largest companies, yet gives room to smaller businesses to contribute to the total score. This unique equilibrium increases market risks but also the potential gains.
Is the Vanguard Information Technology ETF appropriate for you?
After perusing the long-term returns, I've revealed the drawbacks. If preferability for something like the SPDR S&P 500 ETF tops your list in the end, it'll probably lull you to sleep during challenging periods (like the market crises I touched upon earlier).
I'm purely elated to have introduced you to a more exhilarating option. The Vanguard Information Technology ETF may not be the ultimate investment for everyone, and that's perfectly fine. Nevertheless, I enthusiastically urge you to give it a try. These captivating high-growth prospects can be enticing over the long term.
Considering the potential for high returns, some investors might choose to allocate a portion of their investment portfolio to ETFs like the Vanguard Information Technology ETF (VGT). This fund focuses on the information technology sector, which has shown strong performance in the past, as demonstrated by its outperformance of the S&P 500 in the last decade.
To effectively manage risk and diversify their investments, savvy investors often employ a strategy that includes both stable, low-risk funds like the S&P 500 and high-growth funds like the VGT. This approach allows them to benefit from both sectors, leveraging the long-term growth potential of technology stocks while mitigating risk through a balanced portfolio. Therefore, investing in ETFs, such as the Vanguard Information Technology ETF, can be an effective way to maximize returns in the realm of finance and investing.
