VGT: Vanguard Information Technology ETF

woman holding tablet with technology etf

The Vanguard Information Technology ETF follows the tech industry and has been making headlines for several years. Overall, technology stocks have been outperforming the broader stock market. As a result, selecting which tech stocks to invest in may be challenging. Therefore, many investors choose ETFs or exchange-traded funds that expand their selection to the entire technology sector.

ETFs have active management that utilizes strategic trading approaches with the liquidity of individual stocks, making them appealing to the individual investor. With the booming and fast-growing tech sector, Vanguard Technology (VGT) is an attractive low-cost ETF that offers a wide range of tech stocks with a long track record of success.

What is the Vanguard Information Technology ETF?

Vanguard Information Technology ETF currently has 318 stocks in its portfolio. At the moment, the fund’s total net assets amount to $23.2 billion, with ten of its most substantial holdings accounting for 54.5 percent of its worth. As of April 2019, a few of VGT’s top 10 holdings include Microsoft Corp., Apple Inc., and Visa Inc.

Vanguard Technology ETF has a remarkably low internal expense ratio of 0.10 percent a year, which is 74 percent less than the industry average. The average expense ratio of similar funds is approximately 1.29 percent. This lower expense ratio translates into an approximate savings of $2,647 in broker fees with a hypothetical $10,000 investment invested over ten years.

Vanguard Information Technology ETF has a 1.5 percent dividend distributed every quarter.

Investment Approach

Vanguard Technology ETF’s objective is to track the performance of the MSCI U.S. Investable Market Information Technology 25/50 Index. This index includes three principal areas: software services, hardware and equipment, and semiconductors. They are composed of large, mid-size, and small U.S. companies within the information technology sector.

Vanguard Information Technology ETF has multi-capitalization equity in the information technology sector. This ETF utilizes a market-cap weighting approach, the larger the company is, the larger its stock allocation. Despite the market-cap weighting approach, Vanguard Technology ETF has a high level of diversification across its subsectors. Its 318 stocks are currently divided across 13 subsectors of the tech industry.

Its top holdings include Microsoft (MSFT) and Apple (AAPL), which are staples in an investment portfolio. It also has holdings that focus on software services, including cloud-based computing, such as Oracle (ORCL) and Adobe (ADBE). In addition, with payment processing, VGT also has shares in emerging payment tech companies like PayPal (PYPL), making it a fairly diverse in a multitude of subsectors.

The fund employs a passively managed, full-replication strategy of the target index whenever possible. The goal is to hold each stock in approximately the same ratio as its weighting in the target index. If regulatory constraints prevent full replication, the fund implements a sampling strategy to approximate the MSCI US Investable Market Information Technology 25/50 Index’s key characteristics, such as price and earnings ratios, earnings growth, and dividend yield.

Management

The Vanguard Group was launched in 1975 in Malvern, Pennsylvania and is now among the world’s largest equity and fixed income managers. This group has managed and advised Vanguard Information Technology ETF since 2004.

Walter Nejman, who has advised the fund since 2015, is VGT’s portfolio manager. Michael A. Johnson, the other portfolio manager, joined Nejman in 2017.

 

technology etf

Vanguard Technology ETF Stock Trends

Investors who purchased Vanguard Information Technology ETF in early 2009 have seen their investment grow nearly 550 percent as of June 2019. This growth is not surprising as almost every other industry relies heavily on technology. Despite the stock market in 2018 with its less than stellar performance, VGT finished the year with a 1 percent gain, which is particularly impressive since the S&P 500 fell 6 percent.

It is also worth noting the VGT survived the Global Industry Classification Standards (GICS) reclassification of the Information Technology, Telecommunication, and Consumer Discretionary Sectors in September 2018. For example, Amazon (AMZN) and Facebook (FB) were reclassified from Information Technology to Consumer Discretionary and Communication Services, respectively. Investors were concerned that the technology sector may slow down after the shuffle.

Microsoft Corp. (MSFT) is one of Vanguard Technology ETF’s largest holdings, accounting for approximately 15 percent of its net assets. Microsoft released its quarterly earnings report on April 24, 2019, after the closing bell. It exceeded both revenue and earnings estimates, with a 20 percent improvement from the previous year’s quarter. Additionally, revenues rose 14 percent year over year. After the report, Microsoft’s stock jumped 4.6 percent in after-hours trading. As a result, ETFs with Microsoft as its software leader became especially attractive to investors.

Similarly, Apple rivals Microsoft as Vanguard Technology ETF’s top holding, accounting for an estimated 15 percent of its net assets. VGT saw significant inflows of investors in April 2019, anticipating Apple’s second-quarter fiscal 2019 results. In fact, investors poured more than $440 million into the Vanguard fund, which amounted to Vanguard’s most massive weekly inflow ever. Bloomberg reports that VGT recently became the most popular technology sector ETF on the market, replacing its competitor XLK.

Fortunately, Apple’s robust second-quarter earnings did not disappoint investors, as it topped both revenue and earnings estimates. Despite a 17 percent decline in iPhone sales, Apple saw all-time record sales in Services (such as iTunes, Apple Music, and iCloud), iPad, Wearables (Apple Watch), and Home and Accessories (HomeKit). After its second quarterly earnings report, shares of Apple rose 6 percent, solidifying VGT’s popularity in 2019.

Vanguard Technology ETF Risks and Analyst Predictions

VGT has a concentrated portfolio with ten of its most extensive holdings accounting for about 55 percent of its worth, while the top 5 accounts for approximately 42 percent. Microsoft (MSFT) and Apple (AAPL) alone make up 15 percent. Although VGT is diversified amongst different subsectors, with this market-cap weighting approach, there can be substantial risks involved if one or a few stocks do poorly. Fortunately, because these companies are well-established, they are generally less volatile than their smaller comparative peers in the same sector. Nonetheless, technology investors are familiar that this sector tends to be more volatile than the overall market.

VGT’s dividend yield is also not overly impressive. However, tech companies tend to reinvest their profits to further research and development because of the fierce competition. Thus, there is more risk for investors in this industry with less dividend yield. Fortunately, Vanguard Technology ETF has not disappointed investors, as it tends to outperform the broader market. In May 2019, VGT’s fund price increased by nearly 400 percent in the past ten years, whereas the S&P 500 Index only rose about 200 percent.

While VGT performed well during the early and mid-economic cycle phases, the IT sector usually underperforms in the late-cycle and recession phase. Currently, the economy in the United States is in the late stage of its economic cycle, although it is still doing well. The GDP growth rate reaccelerated to 3.2 percent in the first quarter of 2019 as well as saw a drop in unemployment. As a result, investors and analysts are anxiously watching this late stage of the United States economic cycle and are wary of how the sector will perform in the future.

Although Vanguard Technology ETF does not have any international holdings, its domestic holdings, such as Apple, are not immune to geopolitical events. With the United States current trade war with China, U.S. based companies are also affected. The industry sectors with the highest revenue exposure to the trade war include semiconductor and tech hardware and equipment.

Amidst the tariffs and bans, Apple has offered steep price discounts in China in March and April 2019 in hopes to boost sales. Analysts predict that ETFs that have considerable exposure to Apple, such as VGT, may underperform in the near future if US-Sino trade relations worsen.

Vanguard Technology ETF Stock Price

VGT’s current price is $207.80. Its 52-week high was approximately one month ago at $213.79. There is no minimum investment amount to purchase shares of VGT from your brokerage. Additionally, Vanguard brokerage account holders can buy shares without commission fees. However, be sure to check with your broker if there are any additional fees for the buying and selling ETFs.

Conclusion

Since the Vanguard Technology ETF’s inception in 2004, this ETF has curated a variety of stocks in the tech industry, many of which are household names. What set this ETF apart was its ability to pull out a 1 percent gain when the S&P 500 index saw a decline for 2018. Technology continues to make progressive inroads into the whole economy, which fuels the ETFs projected continued growth in 2019.

Due to Vanguard Technology ETF’s market-cap weighting approach, an investor should seriously consider the ETF’s top ten holdings, as they account for more than half of the ETF’s net assets. With Microsoft and Apple as VGT’s top two holdings and exceeding their revenue and earnings estimates time and time again, it sets itself apart as the ETF to consider for day trading.

For more day trading secrets by Michael Robinson, a Venture Capital veteran and Pulitzer-price nominated writer, subscribe to Nova-X Report.

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