VGT a Better Investment Bet than SPY ?
What does the $S&P 500(.SPX)$ market index signify?
It reflects the overall health of the American stock market, with a quality filter based on market capitalization.
Investing in this market tracker through exchange-traded funds (ETFs) like the $SPDR S&P 500 ETF Trust(SPY)$ gives investors a ton of diversification and sets any investor up for robust long-term returns.
Statistically, it has been shown that if a person has invested $1,000 in the SPDR fund 10 years ago and set the position up to reinvest dividend payments in more shares, he / she would have $3,500 today.
That's a compound annual growth rate (CAGR) of +13.2%, leaving inflation rates far behind.
Many investors get started in a popular SPDR 500 fund and let it run for decades, building wealth with zero investor effort.
Would you believe that there are ETFs with even better long-term returns?
There actually is. One “very good” example is the $Vanguard Information Technology ETF(VGT)$.
It has been shown that it tends to beat the S&P 500's returns in the long haul and it's one of Motley Fool’s writer Anders Bylund’s favorite ETFs. (see below)
VGT - 10 years performances
VGT a favourite ?
Looking at above chart, the Vanguard IT ETF has been crushing the S&P 500 and its index trackers over the last decade.
Total returns work out to a CAGR of +20.9%. Over this period, a hypothetical $1,000 investment would have grown to $6,678.
And that's just a simple one-time investment, with no further cash investments added over time.
Dollar Cost Average Method.
However, if one embarks on a “regular” dollar-cost averaging plan instead of a single lump-sum investment by:
Starting with just $100 in the fall of 2014.
Then add another $100 to that Vanguard IT ETF position monthly.
The outcome is very different outcome and a pleasantly surprisingly one as well.
These fairly painless contributions would add up to $12,000 in a decade.
And the returns would be roughly $29,000, working out to a total investment value of $41,118.
Doing the same with the SPDR S&P 500 fund instead would have yielded respectable results, too.
The same $12,000 investment should be worth $25,174 by now, more than doubling the money invested in 10 years.
This is a respectable return for SPDR S&P 500 too.
Comparatively speaking though, would anyone complain having a better “rate of returns” from the IT market tracker ?
No reward without Additional risks
Like any financial prospectus, the upfront qualifying statement (is to the effect that), “no promise market-stomping returns over every conceivable time period”.
The VGT fund underperformed the S&P 500 in its first 5 years on the market, ending amid the subprime market meltdown of 2008-2009.
Then, there is the inflation crisis of 2022, that was no fun for Vanguard IT ETF investors either. (see below)
During challenging times (like abovementioned), the ETF's focus on high-growth investment ideas can result in deeply negative returns.
Good news is however over time, the IT ETF has beaten the S&P 500.
Depending on an investor’s risk appetite or risk profile - the VGT ETF might not be the fund for someone, who cannot afford the occasional price drop along the way.
The fund outperforms in most cases, but it can really hurt when growth stocks (in ETF’s portfolio) run into a brick wall.
ETF's Difference From S&P 500
The fund follows a market index reflecting all American stocks in the information technology (IT) sector.
This results in a list of 317 names (or companies) at the latest update and are weighted by market capitalization.
The 3 largest holdings of VGT (tallying at 48% of ETF total portfolio) are:
Incidentally, the same 3 companies also dominate the S&P 500 index.
However, the 3 stocks combined weightage (in S&P 500 index) stops at just 20% of portfolio currently.
Additionally, the IT ETF index includes many stocks that are too small for S&P 500 (due to its inclusion framework).
This means, the IT-focused fund:
Places a heavier load on the largest companies.
It also lets smaller businesses contribute to the total score, at the same time.
It's a different balancing act that (a) raises market risks but (b) also the potential returns. Therein lies the major differences.
Is VGT ETF for You?
The post has clearly spelt out the (a) potential returns and (b) risks of different investments.
Logically speaking, the SPDR S&P 500 ETF might be a safer choice, especially during market downturns.
At the same time, it also highlighted the VGT ETF as a more exciting option, although it might not be everyone’s cup of tea.
Honestly, the risk associated with a ETF is “mild” compared to equity. Similarly, the rewards too. Taken in stride, VGT is not that risky, is it.
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Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
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This ETF has been the foundation of my IRA since its inception. With AI becoming more mainstream this fund will continue to grow.