VGT: High Growth, High Concentration

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ozgurdonmaz One of the more successful ETFs in recent years has been Vanguard's Information Technology ETF (NYSEARCA:VGT). This fund holds shares of 312 companies in its portfolio, all related in some...

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This fund holds shares of 312 companies in its portfolio, all related in some...</p>\n\n<a href=\"https://seekingalpha.com/article/4678359-vgt-etf-high-growth-high-concentration\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IWY","symbol_name":"iShares Russell Top 200 Growth I","start_time":0,"source_url":"https://seekingalpha.com/article/4678359-vgt-etf-high-growth-high-concentration","article_id":"2419199657","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1705316992/image_1705316992.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2419199657","pubTimestamp":1710465331,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"ozgurdonmaz One of the more successful ETFs in recent years has been Vanguard's Information Technology ETF (NYSEARCA:VGT). 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This fund holds shares of 312 companies in its portfolio, all related in some way to IT. This sector of the economy has grown rapidly in the recent past, and as innovations in the marketplace continue, it is likely that new inventions could continue moving many of the stocks it holds to even higher prices. However, this particular fund has a very high concentration at the top, with only two companies (that are admittedly among the strongest IT companies over the past couple of decades) making up more than 40% of the fund's holdings, and this could prove a risk should one of the two have bad news or a couple of quarters of lower returns. Returns Those looking for solid total returns are likely to find much to like with VGT's historical returns. Over the past year (as of 2/29/2024), the fund has returned a whopping 48.3%. Additionally, over the past 10 years, those returns are just north of 20% annually on average. This average return is around Warren Buffett levels of success, and it would lead to a doubling of an investor's money about every 3.5 years if the rate of return continued into the future. Of course, this is just a 10-year sliver of time, but the longer-term returns are still nothing to sneeze at. This Vanguard offering just hit the 20th anniversary of its inception in late January. Since inception, the fund has returned an average rate of 13.24%, which would lead to an investment doubling in just over 5 years. Short and Long-term Returns for VGT (Vanguard) VGT's history has been strong, but this does not necessarily mean that future returns will match its historic returns. Indeed, when looking at the fund's holdings, there might be some cause for concern. Holdings One of the biggest concerns that investors in this particular fund might have is tied to its diversification. It's true that 312 different companies might seem well diversified. However, a really quick look into the fund's holdings shows that the allocation is very top heavy. Indeed, the top two holdings make up nearly 41% of the fund's investment. These two companies are great options, Microsoft (MSFT) and Apple (AAPL). They have also grown extensively over the past decade, with MSFT showing nearly 1000% growth over the past 10 years and AAPL clocking in with about 847% growth over the same time frame. Similar growth over the next decade would lead to share prices of more than $4,000 and $1,500, respectively. With AI increasingly coming online, this is possible, but definitely not guaranteed, especially considering the fact that both companies have a market cap at or above the $3 trillion mark. The net income has grown with both companies in recent years, but not in line with the PE ratios. The valuations of these stocks are much higher today than they were a decade ago. Ten years ago, MSFT had a PE ratio in the 15 range; today that number is 37.3. Apple was also more attractively priced 10 years ago with a PE number of about 12.7 as of March 30, 2014. Today it's valued at 28 times earnings. Is it likely that these numbers will grow as much in the next decade while producing similar share price returns? It's possible, but the larger companies get and the more market saturation they achieve, the more difficult massive growth becomes. Not only do Apple and Microsoft make up 40% of the fund's holdings, the top five holdings make up more than half of all the money invested through VGT. If a couple of these companies drop, the effect on Vanguard's Information Technology ETF would be massive. ETFs allow for small investments in many different stocks. Vanguard allows for purchases of partial shares for as little as $1, which would give you a minuscule sliver of all 312 stocks in the fund. To give a comparison of how top heavy VGT is, the top two holdings of Vanguard's S&P 500 ETF (VOO) are also Microsoft and Apple. Yet, instead of making up 41% of the fund's market cap as they do in VGT, they make up less than 14% of VOO. The top five holdings make up about 23% of VOO, rather than more than 50%. Additionally, VOO will include many consumer staple stocks that tend to be less volatile in a recession. Those who want to invest in Microsoft and Apple could just buy them outright and then purchase VOO or another broad-based ETF to achieve a higher diversification. Investors in both VOO and VGT will benefit from low expense ratios, although the latter is higher with an expense ratio of 0.10%. This is lower than many other funds that are invested primarily in technology stocks. For example, the iShares US Technology ETF (IWY) has an expense ratio of 0.40% while returning slightly less than VGT over the past ten years with an average total return of 19.67%. Over the past year, VGT has shown a tracking error that has been well in excess of the industry average for all ETFs (12% to 7.79%). However, when looking over the past five years, this difference narrows markedly (10.03% to 9.48%), making the ETF appear stronger in this regard. Income As an investor, I'm interested in the income an investment will return. Income provides an incentive to stay invested in a down market, even though the overall returns might be a bit less. When it comes to dividend income, VGT lags behind the S&P 500 or one of the major dividend focused ETFs that are available. The current yield is 0.6%, which should not be surprising given the fact that Microsoft and Apple provide such as major percentage of the fund's investments. These stocks currently yield 0.73% and 0.53%. These are great companies to hold, but they do not provide much in the way of income. As I get closer to retirement, I'm looking for a higher yield, where I in my early 20s, I'd be more likely to consider VGT. Conclusion  VGT has an impressive history, and the IT sector promises to continue bringing innovation to the marketplace for the foreseeable future. Those looking for a reputable fund manager can definitely do worse than Vanguard, which is known for providing low-cost funds that siphon off less of its investor's capital to fund managers than many other brokerages. However, there is the question of whether the ETF can continue returning 20% per year over the long run. The fact that it is so heavily invested in just a couple of companies leaves it vulnerable if one of those companies has a couple of marginal quarters. Additionally, one wonders how much higher the prices of these companies can go with the current high valuation. There are other options that have solid returns with a greater diversification. Additionally, those who want income to pay for their living expenses will likely have to sell shares to access the funds they need as paying for a $50,000 lifestyle with dividends only would require an investment of $8.33 million at a 0.6% yield. That's out of the range of most people, so there are better options for income.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2419199657"}