During uncertain times, it’s wise to diversify your investments across a range of companies.
The tech sector has experienced impressive growth lately, largely due to the surge in interest around artificial intelligence (AI). This has drawn many investors to tech firms eager to seize the opportunities in this evolving market.
With the rise of tech stock prices, tech exchange-traded funds (ETFs) have inevitably trended upward as well. A notable example is the Vanguard Information Technology ETF (VGT), which has seen a jump of nearly 21% from the start of the year through November. This is on par with the S&P 500 and tech-heavy Nasdaq Composite.
Despite VGT’s strong performance so far this year, I’ve got my reservations about it for this month. Let’s dig into that a bit.
What’s making me cautious about VGT?
VGT is designed to follow the U.S. Information Technology sector and is composed of 314 companies from various industries within that sector. The primary industries include semiconductors, system software, tech hardware, application software, and semiconductor materials and equipment.
An important detail about VGT is that it uses market capitalization to determine its weightings. Consequently, larger companies have a bigger influence on the ETF than smaller ones. This market cap-driven approach is a reason I’m steering clear of VGT in December, especially as some big tech stocks have skyrocketed, leading to an unbalanced impact on the overall fund.
Below are the top three holdings in VGT and their corresponding weights:
| Company | VGT Percentage | Market Capitalization |
|---|---|---|
| Nvidia | 18.18% | $4,366 billion |
| Apple | 14.29% | $4,144 billion |
| Microsoft | 12.93% | $3.63 trillion |
There’s certainly no denying the caliber of these three companies. Nvidia leads in GPUs and hardware crucial for the AI landscape, while Apple has dramatically changed the tech hardware game, and Microsoft serves as a versatile player with widespread industry reach.
However, it’s concerning that these three firms represent over 45% of this ETF composed of 314 stocks.
Are there better options out there?
There are other tech-oriented ETFs offering exposure to substantial stakes in Nvidia, Apple, and Microsoft without overly banking on their individual performances. For instance, the Invesco QQQ Trust ETF tracks the Nasdaq-100. While the three major companies make up about a quarter of this ETF, QQQ’s recent performance has been roughly in line with VGT’s.
Heavy concentration may benefit investors when those companies are doing well—but if they falter, the entire ETF could suffer. Given the growing uncertainty in December, it doesn’t feel right to put too much faith in a handful of companies.
