Technology stocks belong in most portfolios, and that makes Vanguard Information Technology ETF (NYSEMKT: VGT) a smart choice for investors who want exposure in the IT sector without having to single out potential winners or buying dozens of market leaders to make sure they spread out the risks of ownership. Vanguard Information Technology ETF has earned its keep as a smart way for folks to buy into a large basket of tech stocks with minimal maintenance on their end, and also as a tempting add-on for more seasoned stock pickers who want to enhance their individual selections with broader coverage of the entire sector.
The exchange-traded fund mirrors the MSCI US IMI Information Technology 25/50 benchmark, a collection of more than 320 bellwether stocks in the industry. Vanguard is well-regarded for its low expense ratio, and the same disciplined cost controls apply here. Vanguard Information Technology ETF weighs in with a pedestrian expense ratio of 0.1%, well below the 1.3% average of similar funds that includes actively managed mutual funds with historically higher ownership costs. It's a cost-effective way to own hundreds of important tech stocks in a single buy order.
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Tech yourself before you wreck yourself
Last year was understandably a good one for most tech-heavy portfolios, and Vanguard Information Technology ETF came through with a hearty 48.8% dividend-adjusted return in 2019, blowing past the S&P 500's 28.9% gain. This is a cap-weighted portfolio, and despite a median market cap topping $170 billion, the 10 largest holdings account for 57% of the portfolio.
It's no surprise to see that Apple and Microsoft are the two largest holdings of the ETF, as the tech giants also happen to be the country's two most valuable public companies. Despite the ETF's portfolio of 324 investments, Apple and Microsoft account for more than a third of it (clocking in at 34.5% of total assets at the start of 2020).
Some of the other movers may surprise you. The next two largest holdings are credit card behemoths Visa and Mastercard. There are a lot of companies that fall under the IT umbrella in the benchmark that the Vanguard ETF tracks. We're talking about software companies, electronic payment processors, and hardware specialists in the mix -- but not the dot-com darlings that you would find in a broader tech or growth fund.
A strong selling point for buying an ETF as opposed to a traditional index fund is that Vanguard Information Technology ETF doesn't have to account for the rise and fall of outstanding shares, as folks purchase and redeem shares the way we see with open-ended mutual funds. There's less of a need to make trades as the cash balance expands and contracts, and Vanguard Information Technology ETF checks in with a meager 5% portfolio turnover rate.
This ETF offers the best of both worlds, giving investors a strong collection of proven tech stocks in a single low-cost holding. It will be volatile if the market takes a hit, and the downside can be substantial if investors trade out of blue chip tech stocks. Vanguard Information Technology ETF is still a buy.
10 stocks we like better than Vanguard Information Technology ETF
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Rick Munarriz owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Mastercard, Microsoft, and Visa and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.
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