Reasons Vanguard’s Leading Tech ETF May Not Suit Those Interested in AI Stocks

Investing in AI Through Tech ETFs

The buzz around artificial intelligence (AI) is back, and it’s making waves across the stock market, particularly lifting tech stocks. Instead of trying to pinpoint just one winner in this rapidly evolving AI landscape, you might find it more beneficial to invest in tech ETFs. These funds provide a broader exposure to a variety of leading AI companies.

One popular choice is the Vanguard Information Technology ETF (VGT), which has gained traction among investors. Yet, it might not be the ideal pick if you’re specifically targeting AI-focused companies. Let’s dive into the details a bit more.

Classification is Important

The stock market is organized into 11 major sectors, and VGT tracks the information technology sector. Here are the top ten holdings in the ETF as of now:

Nvidia: 18.53%

Apple: 15.85%

Microsoft: 10.21%

Broadcom: 4.38%

Micron Technology: 2.02%

Advanced Micro Devices: 1.75%

Palantir Technologies: 1.74%

Cisco Systems: 1.65%

Applied Materials: 1.47%

Lam Research: 1.45%

What stands out to me is that three major players account for over 44% of this ETF, and notably, they aren’t listed among the top holdings. You won’t find Amazon, Alphabet, or Meta Platforms in that mix. It’s interesting because these three are crucial in the tech landscape.

These companies are significant not just within tech; they’re influential globally. However, they don’t fall into the tech category primarily due to their main revenue sources.

For instance, Amazon is classified under consumer discretionary because of its e-commerce focus. Alphabet, with its search services, falls into the communication services sector. Similarly, Meta operates within the social media space, landing it in the same category. Although all these are fundamentally tech companies, their classifications limit their representation in tech ETFs.

The Value You Miss Without These Giants

Not having investments in companies like these could be a mistake, especially since they are integral to the AI ecosystem.

Amazon (AWS) and Alphabet (Google Cloud) together dominate the cloud platform market, holding 42% of it. Their absence, along with Microsoft’s Azure, would create a significant void in the AI infrastructure. As for Meta, it’s a player in developing open-source AI models and has recently introduced Muse Spark models, which might lead them towards becoming a “superintelligence.”

All three of these tech giants possess much of the data center infrastructure necessary for training and scaling AI today. Their influence is only expected to grow. This year, for example, capital expenditures are projected to land between $500 billion and $530 billion, most of which will be invested in AI initiatives.

A better approach might be to consider investing in a Nasdaq-100-focused ETF, like the Invesco QQQ Trust ETF (NASDAQ: QQQ). This fund not only encompasses the aforementioned giants but also includes key players such as Nvidia, Microsoft, and Broadcom.