Want to buy Nvidia, Microsoft, or Apple? Consider this Vanguard Growth ETF

S&P500 (^GSPC 0.61%) has 500 different companies, weighted by market capitalization. This means that the largest companies in the index have more influence on performance than the smallest companies.

Apple, Nvidia, and Microsoft are the top three companies in the S&P 500, with a combined market capitalization of $9.8 trillion, representing 19.7% of the index. For example, Nvidia stock rose 156% through the first half of 2024, accounting for one-third of the S&P 500’s 15% rise.

In other words, investors who don’t include US tech giants in their portfolios are likely underperforming the overall market. But there is an easy way to buy them without having to predict which one will give you the best return.

Vanguard Mega Cap Growth ETF (MGK 0.07%) is an exchange-traded fund (ETF) with a concentrated portfolio filled with the biggest tech stocks investors want. Here’s why it’s a great alternative to buying individual stocks.

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The world’s highest quality companies come together in one ETF

ETFs can hold hundreds or even thousands of different stocks. However, the Vanguard Mega Cap Growth ETF only has 71 holdings, making it ideal for investors who already have an existing portfolio but want to add exposure to the largest growth companies in the United States, especially.

The ETF holds stocks from 10 different sectors of the economy, but has a whopping 61.4% weight in technology due to the size of companies like Apple, Microsoft, and Nvidia.

In fact, the ETF is highly concentrated in its top five holdings for that reason. This table shows the weights in the ETF compared to the weights in the S&P 500 index.

Data source: Vanguard. Portfolio weightings are accurate as of August 31 and are subject to change.

Significantly increasing your weight in these stocks can be a double-edged sword. This is because the Vanguard ETF outperforms the S&P 500 index when a particular stock performs well, but because it lacks diversity compared to the index, it may underperform when stock prices are turbulent. means high.

That being said, these five companies are among the most important in the fast-growing artificial intelligence (AI) industry. Apple is deploying Apple Intelligence software developed in partnership with OpenAI. This will transform the way iPhone, iPad, and Mac users create and consume content. Apple has over 2.2 billion active devices worldwide, so the company could soon become the largest distributor of AI to consumers.

Microsoft and Amazon have developed their own AI virtual assistants that are built into their flagship software products. Additionally, Microsoft Azure and Amazon Web Services cloud platforms are the two largest AI distribution channels for enterprises, giving them access to off-the-shelf models and data center computing power for their development needs.

Nvidia’s data center graphics processing chips (GPUs) are at the heart of the entire AI revolution. The company’s H100 GPU set a benchmark for AI developers last year, and the company is preparing to ship new Blackwell-based GPUs in large quantities that deliver an incredible leap forward in performance and cost efficiency.

It’s not all about technology, as the Vanguard ETF also owns popular mega-cap stocks such as Eli Lilly, Tesla, Costco Wholesale, and McDonald’s in addition to the top five.

Vanguard ETF consistently outperforms the S&P 500

Since its inception in 2007, the Vanguard ETF has delivered a compound annual return of 13.1%, which is significantly better than the S&P 500’s average annual return of 10.2%.

The ETF delivered an even stronger annual compound return of 20.2% over the past five years. That’s because the rapid adoption of technologies like cloud computing and AI is driving valuations of stocks like Nvidia, Microsoft, and Amazon into the trillions of dollars. The S&P 500 rose 16.7% (on average) annually over the same period.

In other words, if technology stocks continue to lead the overall market rally, investors should expect the Vanguard ETF to outperform the S&P 500 due to its massive exposure to the sector. Some Wall Street forecasts suggest that AI could add between $7 trillion and $200 trillion to the global economy over the next decade. If that’s true, tech stocks would be one of the best investments.

Conversely, if AI fails to live up to the hype, the Vanguard ETF could underperform for a period of time, as stocks like Nvidia stand to lose a significant portion of the value they have generated over the past few years. be.

According to Vanguard, the Vanguard ETF has a very low cost to own, with an expense ratio (the portion of the fund that is deducted annually to cover operating costs) of just 0.07%, which is more than 90% cheaper than comparable funds. So investors looking for exposure to a large portion of the stock market without picking individual winners and losers need look no further.