2024 has been quite the year on Wall Street so far. After an epic emergence from the bear market, the artificial intelligence (AI) boom has investors seeking out “what’s next.” Remarkably, even though Nvidia (NASDAQ: NVDA) — still the bellwether stock of the AI trend — is up over 80% year to date, a few companies (like Super Micro Computer (NASDAQ: SMCI) and Vertiv Holdings (NYSE: VRT), to name just two) riding its coattails are up by even more.

If you fear you’ve missed out, but have even greater fear (rightfully) of chasing the hottest stocks, there could be a solution. The Vanguard Information Technology ETF (VGT) has a long track record of market-obliterating performance. Here’s why it could still be an ultimate long-term growth investment.

What is VGT exactly?
This exchange-traded fund is a passively managed market-cap-weighted basket of U.S.-based tech stocks. In simple terms, that means there’s no active management team constantly choosing which stocks to buy and sell for the Vanguard Information Technology ETF. Rather, all stocks that are classified as tech (as outlined by the technology index from financial data company MSCI upon which VGT is based) are purchased and allowed to do their thing without any tampering.

As a result, the size of a business will dictate how big of a position its stock will comprise in the ETF’s portfolio. The bigger the business, the bigger the allocation. As of the end of April 2024, the 10 largest tech businesses made up nearly 60% of the value of the Vanguard Information Technology ETF.

Note that Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) and Meta Platforms (NASDAQ: META) aren’t included. They were both reclassified as “communications sector” businesses back in 2018 under the Global Industry Classification Standard (which was developed by MSCI and Standard & Poor’s), and were therefore dropped from the tech index. Likewise, Amazon (NASDAQ: AMZN) and Tesla (NASDAQ: TSLA) are nowhere to be found in its holdings, as they are classified as “consumer discretionary” stocks.

Since it’s a passive fund, Vanguard only charges 0.1% in annual fees — working out to just $1 per year in expenses deducted from fund performance for every $1,000 invested into the ETF. That has contributed to its outperformance of market indices like the S&P 500 and Nasdaq Composite.

A long tail of future market leaders
Low fees, however, are not the primary reason for VGT’s market-crushing investment performance. This may seem like a plain-vanilla mega-tech fund based on its top 10 holdings. However, there are actually 312 stocks in the Vanguard Information Technology ETF, including a long list of mid-cap and small-cap businesses.

If you scroll to the final page of VGT’s portfolio holdings, for example, you’ll find three businesses with market caps well under $1 billion. One is a developer of LiDAR sensors for autonomous vehicles, one markets an AI chatbot for businesses, and the last is a semiconductor design start-up.

Most of these small-caps stocks, which make up an insignificant part of the VGT portfolio, will stagnate at best. However, a small handful of them could experience explosive growth. Perhaps one or another could someday take the role of “the next Nvidia.”

In fact, Nvidia and some of its semiconductor peers illustrate the beauty of the strategy of having a big cluster of small stocks represented in a portfolio. A decade ago, Nvidia was a tiny part of VGT, as were Broadcom and AMD. But thanks to their massive outperformances of the market, they jumped into the fund’s top 10 holdings and helped supercharge VGT’s performance along the way.

In the decade or so I’ve owned shares of the Vanguard IT ETF, my investment has done quite well. The megacap movers and shakers that dominate the portfolio today could keep this fund in growth mode for years.

Meanwhile, some of those smaller businesses that are trying to innovate now could develop into the “next big thing,” so those with the patience to buy and hold for years can gain exposure to those future disrupters now. I’ll be happy to own shares of this ETF for the indefinite future.

— Nicholas Rossolillo

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Source: The Motley Fool