Vanguard Information Technology ETF: A Great Low-Cost Compounder (NYSEARCA:VGT)
Introduction
The Vanguard Technology ETF (VGT) is a very popular vanguard technology fund that tracks the market-cap-weighted MSCI US Investable Market Information Technology 25/50 Index. The ETF holds information technology companies and has a very strong performance track record. The fund charges a very low fee for a tech-based ETF at just 0.10%. The ETF has over $35 billion in assets under management and holds over 300 positions, making it substantially more diversified than most competing technology ETFs.
Source: Unsplash
Portfolio Construction and Holdings
VGT is a technology ETF, so it's no surprise that the Software & IT Services sector makes up around 51% of the fund. Of course, other technology sectors like computers & phones, and semiconductors also dominate the fund coming in at around a 40% weighting. Finally, the fund holds a few companies from multiple sectors like communications, electronics, and even some machinery & equipment, renewables, and media sector holdings.
Source: ETF.com VGT Overview
As for individual companies Apple (AAPL) tops the list. This seems to be a common theme among many technology ETFs. Microsoft (MSFT) is the 2nd largest holding at around 17% of the fund. From there, the holdings weightings drop off rapidly. Visa (V) is the third-largest holding in the fund at just 3.47%. Competitor Mastercard (MA) is the fifth holding, While Nvidia (NVDA) sneaks in between the credit card payment companies at 4th. Adobe (ADBE) and salesforce (CRM) each make up a little over 2.5% of the fund. Paypal (PYPL), Intel (INTC), and Cisco (CSCO) round out the last three spots in the top 10. The top 10 holdings make up nearly 62% of the entire fund. This is quite concentrated for a 300+ holdings fund and means that although the fund has more holdings than most other tech ETFs, smaller holdings that don't carry as much weight may not end up having all that much of an impact on the portfolio returns overall going forward.
Notably absent from the fund's holdings are technology giants Amazon (AMZN), Facebook (FB), and Alphabet (GOOG). Something like the Invesco QQQ Trust (QQQ) does hold these tech names, so those looking for exposure to those three names may want to go with QQQ over VGT. Also notable is that the Technology Select Sector SPDR Fund (XLK) owns the exact same top 10 companies in the exact same order, but that fund charges a fee of 0.13%.
Stellar Performance
Over the last several years, the Vanguard Information Technology ETF has outperformed almost every other tech ETF out there, including the NASDAQ 100 ETF QQQ. The iShares US Technology ETF (IYW) comes close, and XLK is also not too far behind, but all three of these ETFs are above QQQ. I probably don't have to mention this, but all of these funds have significantly outperformed the S&P500.
For now, VGT stands on top, but there is no guarantee that this will continue going forward. Although given how close many of the holdings are, VGT's lowest fee, and the fact that VGT is more diversified with the sheer number of holdings I think the ETF stands a reasonable chance to continue its outperformance.
Source: VGT Home Page
As for the benchmark, VGT has remained within a few basis points of the benchmark index on virtually all timeframes.
Conclusion
VGT has proven itself over time to be a well-rounded low-cost technology ETF. Not only has it outperformed competing ETFs, but it has also even outperformed the NASDAQ 100, which is quite impressive. Future returns are hard to estimate though and there is always the possibility of the fund underperforming others going forward. That said, the fund charges the lowest fee of its peers and has the strongest track record, so if I were to buy and hold a technology ETF, VGT would likely be at the top of my list.
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