Over the last twenty years, the Vanguard Information Technology ETF (VGT) has transformed ordinary investments into extraordinary gains.

Picture this: if you had invested a modest $100 monthly in VGT, you would now be looking at a sum around $132,000. In contrast, the same investment in the S&P 500 index fund would have grown to about $78,000.

And what is the secret behind such impressive performance? Well, the answer lies in the powerful tide of technology, which VGT has ridden with remarkable success.

There is no doubt that the past two decades have been a golden age for technology due to the many transformative trends that have enriched our lives. For instance, the adoption of cloud computing has revolutionized data storage and accessibility, cybersecurity has become a cornerstone of digital safety, and e-commerce has reshaped retail. In addition, mobile devices have changed how we communicate, social media has transformed our interactions, and streaming services have altered our entertainment consumption. 

And as mentioned above, VGT’s portfolio, which is packed with technology titans, has been at the forefront of these changes, reaping the benefits of rapid digital transformation. In fact, from 2004 to today, the VGT has delivered a staggering total return of 1,310%, equating to an annualized return of 14.1%. In comparison, the S&P 500 has returned 599%, or 10.2% annually.

Moreover, looking ahead, the momentum of technology shows no signs of slowing down, especially with artificial intelligence (AI) now playing a key role. And although it may deal with some challenges throughout the way, something unquestionably is that AI is poised to revolutionize industries and redefine the future of technology.

According to projections, spending on AI hardware, software, and services is expected to grow at an annual rate of 37% through 2030, and this growth promises substantial opportunities for companies enabling AI’s development – think chipmakers, cloud infrastructure providers, and software vendors integrating AI into their offerings.

VGT’s composition reflects this forward-looking vision. The ETF encompasses 313 technology stocks across three primary categories: internet services and infrastructure, technology consulting and equipment, and semiconductor manufacturing. Leading this charge are giants like Microsoft, Apple, and Nvidia, which as we all know, are the front-runners in the AI sector. 

Furthermore, adding to the allure of high returns, VGT also offers many other practical advantages. One standout feature is its low expense ratio of just 0.1%, which is substantially lower than the average expense ratio of similar funds – around 0.98%. This lower fee structure translates to more of your money working for you, enhancing net returns over time.

However, keep in mind that as all kind of investments, VGT is without its risks. The top five holdings – Microsoft, Apple, Nvidia, Broadcom, and Salesforce – constitute nearly 50% of the fund’s weight, which means that VGT’s performance is significantly influenced by the fortunes of these few companies. Nevertheless, this also means that if those companies encounter challenges or volatility, the fund’s overall returns could be affected, despite its broad base of other holdings.

Therefore, to mitigate such concentration risk, a smart move would be to treat VGT as part of a diversified investment strategy. This is essentially because, although the technology sector’s potential for growth is immense and very likely, it is also susceptible to rapid changes and disruptions. 

A balanced investment approach might involve allocating a portion of your portfolio to sector-specific ETFs like VGT while maintaining a diversified portfolio with investments in broader market indices, such as the S&P 500. This strategy allows you to tap into the high-growth potential of the technology sector while spreading risk across various sectors and asset classes.

For most investors, it is wise to keep the allocation to VGT to a relatively small percentage of the overall portfolio, perhaps no more than 10%. This way, you could still benefit from the growth potential of leading technology companies without overexposing yourself to the risks associated with sector-specific investing.

In conclusion, as AI and other emerging technologies continue to shape the future, VGT seems to be well-positioned to capitalize on these trends. But remember, to make the most of these exciting opportunities, it is essential to invest strategically and diversify your portfolio wisely.