Many investors use ETF Invesco QQQ (NASDAQ: QQQ) as an indicator of the presence of technology companies in their portfolios. In fact it’s just for the most part technology exchange-traded fund (ETF).
Now about 67% Nasdaq-100 The index that QQQ tracks is a technology index. There are all the famous artificial intelligence (AI) names here, such as Nvidia, AppleAnd Microsoft at the top of the portfolio. But you may not realize that by owning QQQ, you also own Walmart, PepsiCo, StarbucksAnd American electric power industry.
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It is the non-technological risks in the Invesco QQQ ETF that are dragging down returns.
For pure technology investments I like Vanguard Information Technology ETF (NYSEMKT: VGT). It has a more concentrated effect and its results over the last decade have been second to none.
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Why VGT is the Best Tech ETF
Most technology ETFs have two characteristics: a high concentration in top 10 holdings and a strong bias toward large caps. The Vanguard Information Technology ETF has some of the same problems, but not to the same extent as its peers. The 58% distribution among the top 10 holdings is slightly below the 60% average for this category. But the 80% allocation to large-cap stocks is actually well below the 90%-plus level of the next two largest tech funds. State Street Technology Select Sector SPDR ETF (NYSEMKT:XLK) and iShares US Technology ETF (NYSEMKT: IYW).
This is a relatively small difference in diversification profiles, but I think it will become increasingly important. With all of the Magnificent Seven stocks in correction territory as of late, the extra weight in smaller companies could pay off over the next six to 12 months.
Additionally, the 10-year CAGR of 25.4% is undeniable.
What buying VGT means for your portfolio
Honestly, this may not make much difference in terms of sector concentration or which stocks are the largest holdings in your portfolio.
Anyone who owns the Invesco QQQ ETF or even just S&P 500 Index fund like Vanguard S&P 500 ETF (NYSEMKT: VOO) has already invested a significant portion of its portfolio in technology. The addition of the Vanguard Information Technology ETF will only make technology-focused portfolios even more concentrated.
But the Vanguard Information Technology ETF is, in my opinion, a better choice than the Invesco QQQ ETF because of its focus on technology. If you want to invest in technology, I don’t want a fund that is primarily in technology.
Given the expected earnings and growth forecasts for tech stocks over the next 12 months, I think there is even more growth potential for this sector. But I wouldn’t expect an average annual return of 25% over the next decade.
Investors who want to reduce exposure to mega-cap stocks may want to consider Invesco S&P 500 Equal Weight Technology ETF (NYSEMKT: RSPT).
Is the Vanguard Information Technology ETF worth buying right now?
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David Dierking has positions at Apple. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, Starbucks, Vanguard S&P 500 ETF and Walmart. The Motley Fool has disclosure policy.
This Tech ETF Is Marginally Outperforming QQQ in 2026—Is There Still Time to Buy? originally published by The Motley Fool