Why Vanguard’s Flagship Tech ETF Might Not Be a Good Investment if You’re Interested in AI Stocks

Key Points

Although the technology itself isn’t new in itself, the reemergence of artificial intelligence (AI) has taken the world by storm and boosted plenty of tech stocks along the way. Instead of trying to pick a single winner in the AI race, you can benefit from investing in a tech ETF that gives you exposure to many of the AI heavyweights.

Vanguard’s flagship tech ETF, the Vanguard Information Technology ETF (NYSEMKT: VGT), is a popular go-to for people wanting to invest in tech stocks, but it might not be the best option if you’re looking to invest in AI stocks. Let’s take a look at why.

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Classifications matter

The stock market is divided into 11 major sectors, including the information technology (tech) sector, which VGT tracks. Here are its top 10 holdings and how much they account for in the ETF as of this writing:

• Nvidia: 18.53%
• Apple: 15.85%
  
• Microsoft: 10.21%
  
• Broadcom: 4.38%
  
• Micron Technology: 2.02%
  
• Advanced Micro Devices: 1.75%
  
• Palantir Technologies: 1.74%
  
• Cisco Systems: 1.65%
  
• Applied Materials: 1.47%
  
• Lam Research: 1.45%

The most noticeable thing to me — aside from three companies accounting for over 44% of the ETF — is the companies that are not listed in the top 10 holdings. There’s no Amazon, Alphabet, or Meta Platforms on the list.

Those are three of the most important and valuable companies in the world, not just in tech. But they’re missing because of how they’re technically classified, which is based on their main source of revenue.

Amazon’s main business is e-commerce, so it’s in the consumer discretionary sector; Alphabet mainly deals with search services, so it’s in the communication services sector; and Meta operates social media platforms, so it’s also in the communication services sector. In reality, all three companies are universally considered tech companies.

What you’re missing by not having these companies

All three companies play major roles in the AI ecosystem, so investing in an ETF for AI exposure and not holding them would be doing yourself a disservice.

Amazon (AWS) and Alphabet (Google Cloud) operate the world’s largest and third-largest cloud platforms, combining for a 42% market share. Without them (and Microsoft’s Azure), the AI ecosystem would be missing critical infrastructure. Meta was vital in creating open-source AI models and recently released its Muse Spark model, which it says puts it on the path toward “superintelligence.”

All three companies also own many of the data centers and infrastructure necessary to train and scale AI to the level we see today. Their footprint is only going to get larger, too. This year alone, they’re expected to have capital expenditures between $500 billion and $530 billion — most of which will go toward AI initiatives.

A better option would be to invest in a Nasdaq-100 ETF like the Invesco QQQ Trust ETF (NASDAQ: QQQ), which includes these three companies, as well as other heavyweights like Nvidia, Microsoft, and Broadcom.

Should you buy stock in Vanguard Information Technology ETF right now?

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Stefon Walters has positions in Apple and Microsoft. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Applied Materials, Broadcom, Cisco Systems, Lam Research, Meta Platforms, Micron Technology, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.