Technology stocks have consistently beaten the S&P 500, and that trend could continue as AI spending increases.
The S&P500 (^GSPC -0.02%) tracks the performance of 500 large-cap stocks covering approximately 80% of US equities and approximately 50% of global equities by market value. The index includes many of the world’s most influential companies, and investors regularly use the index as a performance benchmark for their own portfolios.
However, most investors fail to outperform the S&P 500 over the long term. Even professional money managers typically fall short. In fact, 90% of large-cap funds have performed worse than the benchmark index over the past ten years. But investors could beat the odds with a tech-focused index fund.
The Vanguard Information Technology ETF (VGT 0.39%) the S&P 500’s gains have more than doubled over the past decade, and the market-losing returns could continue as artificial intelligence spending soars in the coming years. Here’s what investors need to know.
The technology sector has consistently crushed the S&P 500
The S&P 500 includes companies from eleven stock sectors, but a single sector has been responsible for a large percentage of the index’s gains in recent years. “The technology sector has generated 32% of global stock returns and 40% of US stock market returns since 2010,” said Goldman Sachs.
The chart below further illustrates that point. It compares the total return of the technology sector with the total return of the S&P 500 over different time periods. Note that technology stocks have often doubled gains in the index.
|
Total return |
Technology sector |
S&P500 |
|---|---|---|
|
3 years |
68% |
36% |
|
5 years |
225% |
110% |
|
10 years |
720% |
275% |
|
20 years |
1,810% |
677% |
Source: YCharts.
Importantly, the tech sector’s outperformance is not the result of hype or irrational valuations, but rather solid financial fundamentals. “The global technology sector’s earnings per share are up about 400% from their pre-Great Financial Crisis peak, while all other sectors combined are up 25% over that period,” Goldman Sachs said.
The Vanguard Information Technology ETF could outperform the S&P 500 over the next decade
The Vanguard Information Technology ETF tracks 316 technology stocks that fall into four broad categories: (1) chipmakers and semiconductor equipment manufacturers, (2) cloud infrastructure and platform services providers, (3) software providers, and (4) hardware and equipment manufacturers. The five largest investments in the fund are listed below by weight.
- Apple: 16%
- Microsoft: 14%
- Nvidia: 13.9%
- Broadcom: 4.6%
- Oracle: 1.8%
The long-term outperformance of the technology sector can be attributed to the explosive growth of cloud computing, although other secular trends have also contributed, including the proliferation of mobile devices, online shopping and streaming media. These technologies will only become more relevant, but artificial intelligence (AI) appears to be the technological transformation that will define the next decade.
Grand View Research estimates that spending on AI hardware, software and services will increase 37% annually through 2030. And the five companies mentioned above could be among the biggest beneficiaries of the AI boom.
- Apple will add AI features to iPhones and MacBooks with software updates said to arrive on October 28, and some analysts expect a historic upgrade cycle to follow.
- Microsoft is the second largest cloud services provider and an early leader in generative AI thanks to its partnership with ChatGPT creator OpenAI.
- Nvidia is the leader in graphics processing units (GPUs) for data centers, chips that are the industry standard in accelerating workloads such as AI training and inference.
- Broadcom is a market leader in networking chips and custom silicon, two categories of semiconductors that should see strong demand as companies build out their AI infrastructure.
- Oracle is the fifth largest cloud services company and is currently building a data center that will be used to train one of the world’s largest AI models.
The last item of interest is the fee structure. The Vanguard Information Technology ETF has an expense ratio of 0.1%, meaning investors pay $1 annually for every $1,000 invested in the fund. By comparison, the average index fund had an expense ratio of 0.36% in 2023, according to Morning star.
The bottom line: The Vanguard Information Technology ETF is a relatively cheap and easy way to gain exposure to stocks in the technology sector, the best-performing market sector in recent history. The index fund is a particularly attractive option right now, as many technology companies are likely to benefit from it as artificial intelligence evolves in the coming years.
Trevor Jennevine has positions at Nvidia. The Motley Fool holds positions in and recommends Apple, Goldman Sachs Group, Microsoft, Nvidia, and Oracle. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
