Exchange-traded funds (ETFs) could be seen as the equivalent of the tortoise in Aesop's famous fable of the tortoise and the hare by some investors. Like the fabled tortoise, ETFs win the race but do so by being slow and steady.
But not every ETF fits that stereotype. Some funds sprint like Aesop's hare and are big winners for investors. One Vanguard ETF even turned $10,000 into over $28,000 in just five years.
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A high-flying Vanguard fund
You don't have be a rocket scientist to figure out what kinds of stocks the Vanguard Information Technology ETF (NYSEMKT: VGT) focuses on. This Vanguard fund tries to track the performance of the MSCI US Investable Market Information Technology 25/50 Index, which includes only U.S. stocks in the information technology sector.
The Vanguard Information Technology ETF currently owns 316 stocks, just one less than its benchmark index. Its top holdings include Apple , Microsoft , Nvidia , Broadcom , and Oracle . Together, these five stocks make up over half of the ETF's portfolio.
The ETF was created in January 2004. Since then, it has delivered an average annual return of 13.55%. But it has really taken off over the last five years. During this period, the Vanguard Information Technology ETF's market price has grown by an annual compounded average of around 23.2%.
Many of the stocks owned by this Vanguard ETF don't pay dividends, but some do. With dividends reinvested, the fund has turned an initial investment of $10,000 five years ago into close to $28,440 today.
VGT Total Return Price data by YCharts
Why this ETF has performed so well
The most important factor behind the stellar performance of the Vanguard Information Technology ETF is the rapid adoption of artificial intelligence (AI), especially generative AI . All five of the fund's top holdings have strong AI credentials.
Nvidia has been a monster winner due to AI. Its share price has skyrocketed more than 28x over the last five years as customers bought the company's graphics processing units (GPUs) hand over fist to power AI models.
Broadcom stock has soared over 520% during the period. The company has emerged as a leader in AI infrastructure. Apple's share price has nearly quadrupled over the last five years. Its big gains in 2024 are largely due to excitement over the company's new generative AI capabilities. Microsoft and Oracle have seen their stocks roughly triple thanks to a big AI tailwind.
The Vanguard Information Technology ETF might not have been able to deliver such huge gains, though, during an economic downturn. It's certainly helped that the U.S. and global economies bounced back quickly from the COVID-19 pandemic. Many experts predicted the U.S. would enter into a recession over the last couple of years, but the economy remained stronger than expected.
We can't leave out the Vanguard ETF's low costs, either. Its annual expense ratio is only 0.1%, well below the Lipper peer average of 1.303%. The fund's returns would have been lower if its expenses were significantly higher.
Is the Vanguard Information Technology ETF a buy now?
It's possible that the Vanguard Information Technology ETF won't be able to keep up its strong momentum. Valuation could become a problem. The average price-to-earnings ratio for the stocks in the ETF's portfolio is a sky-high 35.6.
However, this valuation metric should be viewed in the context of the growth generated by the stocks owned by the fund. We're only in the early innings of the AI era. Tech stocks that focus on AI (as all of the Vanguard ETF's top holdings do) could continue delivering exceptional returns for years to come.
The Vanguard Information Technology ETF could be volatile, especially with a handful of stocks accounting for a large percentage of total assets. Perhaps it won't be able to turn a $10,000 investment into more than $28,000 over the next five years. But I think this ETF remains a good pick for long-term investors.
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Keith Speights has positions in Apple and Microsoft. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Oracle. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .
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