Low-cost Vanguard ETFs are an effective way to invest in a specific sector or theme.
apple (AAPL -0.82%) and Oracle (ORCL -1.23%) It soared to an all-time high on Wednesday.
Apple is up more than 14% in the past month. This recent rally is largely due to the positive response to its annual Worldwide Developers Conference. Apple has been integrating artificial intelligence (AI) into several key product categories. Meanwhile, Oracle is up 19% in the past month, further boosted by its recent financial results and guidance.
Oracle is listed on the New York Stock Exchange Nasdaq Composite Index Or there are exchange-traded funds (ETFs) that focus on the Nasdaq. But Apple and Oracle are Vanguard Total Stock Market ETF (VTI -0.07%), Vanguard S&P 500 ETF (VOO 0.08%)and the Vanguard Information Technology ETF (V.G.T. 0.39%)Here, we’ll provide an overview of each fund, why all three have reached all-time highs, and which are the best funds to buy now.
Image source: Getty Images.
Diversification
The Total Stock Market ETF and S&P 500 ETF are the two largest ETFs in Vanguard ETFs, both with over $1 trillion in net assets. Both funds have an expense ratio of 0.03% and an annual fee of $3 per $10,000 invested. The low cost and simplicity of these funds make them a great option for those looking for a passive yet effective way to mirror the performance of the overall market.
The Vanguard Total Stock Market ETF holds 3,719 stocks, while the Vanguard S&P 500 ETF holds 504. However, large companies are very valuable and the S&P 500 represents about 80% of the U.S. stock market’s market capitalization, which is why the performance of the two ETFs is very similar.
When large- and mega-cap stocks are outperforming mid- and small-cap stocks, the Vanguard S&P 500 ETF generally performs better than the Vanguard Total Stock Market ETF. The past 18 months or so have been a great example of what to expect when large-cap stocks are driving the market.
As you can see from the chart, mega-cap growth stocks are dominating the S&P 500, with mega-cap stocks doing well while mid-cap and small-cap stocks are underperforming. Yet even in that environment, the Vanguard S&P 500 ETF only outperformed the Vanguard Total Stock Market ETF by a few percentage points.
So, despite the big difference in the holdings of the two funds, both funds will perform essentially the same because the S&P 500 represents a larger share of the overall market.
A cheap way to invest in the hottest stock market sectors
The easiest way to invest in companies like Apple and Oracle without paying high fees is through the Vanguard Information Technology ETF. The ETF’s expense ratio of 0.1% is higher than Vanguard’s larger fund’s 0.03%, but the difference is only $7 per $10,000 invested.
The technology industry is home to three of the world’s most valuable companies: Apple, Microsoft (Nasdaq: MSFT)and NVIDIA (NASDAQ: NVDA)But it also includes companies that require more detailed work, such as material and component suppliers.
Still, the fund will essentially do well or badly depending on how its three biggest holdings and two biggest industries, semiconductors and software, perform.
The semiconductor industry is benefiting greatly from the AI-driven market surge. Case in point: Nvidia, which is now the third company to reach a market capitalization of over $3 trillion. BroadcomThe company has smashed profit expectations and its market capitalization surpassed $800 billion on Friday.
With the technology sector making up 30.6% of the S&P 500 and the semiconductor industry making up 27.6% of the technology sector, some quick math tells us that the semiconductor industry makes up 8.5% of the total S&P 500. This means that the semiconductor industry has roughly the same weighting as the entire industrial sector, or energy, utilities, and materials. Combined.
The technology sector includes companies that provide the computing power needed to run complex AI models, as well as companies investing in ways to apply AI to businesses and consumers. That’s why the technology sector stands out as a great sector to invest in if you want to get in on a growing trend.
Well-deserved premium rating
The risk in buying hot tech stocks right now is valuation: The Vanguard Information Technology ETF has a P/E ratio of 42.6. Earnings growth has been solid, but much of that gain has come from expanding valuations.
Apple’s P/E ratio has risen to 33.2, compared to a three-year median of 28.1. Microsoft’s P/E ratio is 38.2, compared to a three-year median of 33.3. Oracle’s P/E ratio is 37, compared to a three-year median of 30.2. The list goes on and on.
Over the long term, tech companies are best positioned to deploy capital in high-margin opportunities that lead to earnings growth. I will admit that the sector is a bit overinvested at the moment from a valuation perspective, but it still has the ingredients to be a great investment. So if you have a high risk tolerance, the Vanguard Information Technology ETF is a better buy than the Vanguard S&P 500 ETF or the Vanguard Total Stock Market ETF.
Daniel Felber has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Microsoft, Nvidia, Oracle, Vanguard Index Funds-Vanguard Small-Cap ETF, Vanguard Index Funds-Vanguard Total Stock Market ETF, and Vanguard S&P 500 ETF. The Motley Fool recommends buying Microsoft January 2026 $395 calls and selling Microsoft January 2026 $405 calls. The Motley Fool has a disclosure policy.
