3 days Ago
ilkercelik Vanguard Information Technology Index Fund ETF ( NYSEARCA: VGT ) is a passively managed investment portfolio that seeks to track the performance of the Information Technology Spliced Index. For the sake of comparison and overlap, I will be comparing VGT to the Invesco QQQ Trust ETF ( QQQ ) given its popularity as an investment vehicle. Given VGT’s appealing fee structure, performance, and concentrated exposure, I believe that VGT can provide investors a more competitive investment strategy when compared to the QQQ.
For those seeking exposure to the technology sector, I recommend VGT with a BUY rating with a target allocation of 3-5%. Portfolio Strategy VGT is a passively managed portfolio that seeks to track the performance of the domestic technology sector. VGT is an all-equity strategy that holds 318 individual stocks.
The average P/E ratio mirrors its benchmark at 38.5x and has a turnover rate of 15.4%.
VGT’s weights are in line with its benchmark, the Information Technology Spliced Index, and are identical to exposure to the underlying index. Corporate Reports VGT has a total net asset value of $87.3b.
Individual shares are valued at $569/share at the close on September 9, 2024. VGT is relatively top-weighted, with the top 3 holdings making up 47.08% of the total weightings.
The top holdings in VGT include Apple ( AAPL ) at 17.23%, Microsoft ( MSFT ) at 15.85%, and NVIDIA ( NVDA ) at 14% with the top 10 holdings comprising 61.
12% of the total portfolio weight. Corporate Reports For comparison purposes, I will be using the Invesco QQQ ( QQQ ) given the popularity and exposure to similar investments. This compares to the NASDAQ-100, where the top 10 constituents comprise 49.
79% of the total portfolio weight. Within the NASDAQ-100, Apple comprises 9.11%, Microsoft at 8.
39%, and Nvidia at 7.67%, suggesting that the VGT strategy is significantly more concentrated and less diversified. Despite the concentration risk in VGT, the portfolio performs relatively in line with the NASDAQ Index, suggesting that the weighting component does little to differentiate VGT from QQQ.
TradingView Comparing the two strategies, VGT is highly correlated to QQQ with minimal variance. Given this factor, I believe that selecting an investment strategy to cater to the technology sector will come down to fees. VGT commands a 10bps expense ratio, while QQQ has a fee of 20bps, making VGT a more appealing option for long-term investors.
Looking at trading volumes, QQQ is significantly more active, with an average 29mm shares trading hands on a daily basis. VGT’s volume is much lower at 313k. I believe that this should be considered prior to making an investment in the strategy, depending on the investor’s motives.
If the investor is seeking to actively trade the portfolio strategy, I believe QQQ will make for a more viable option given the trading volumes. If the investor is seeking a buy-and-hold investment strategy, VGT offers a much lower expense ratio. Another appealing factor for VGT is the yield.
VGT has a forward yield of 0.65%, slightly above QQQ’s yield of 0.57%.
Factoring in fees, VGT will provide the investor 0.55% in income on an annual basis, while QQQ will provide 0.37%.
Though I wouldn’t expect either portfolio to be used for its income component, the small incremental changes can create a certain appeal for longer-term investors. Macro Factors Given the uncertainty in the broader economy, I believe there may be significant risks to consider before investing in the portfolio. Taking a look into the recent CYq2’24 earnings season, the megatech companies that hold significant weight in VGT have been met with increased investor scrutiny as shares have sold off as a result of either not meeting analysts’ expectations in the current quarter or guidance.
TradingView Despite the sell-off, shares have since recovered some ground, nearing their pre-earnings price level as a result of investor confidence in the broader market. There are two major events worth considering in the coming months that may impact VGT, 1: the September 19, 2024 Fed meeting where economists anticipate a reduction in the Federal Funds Rate, and: the November 5, 2024 presidential election. I believe that each of these events can create significant volatility for their own respective reasons, which may result in various directional changes.
If the Fed decides to maintain rates in their upcoming meeting, I believe that the tech sector may experience a sell-off as a result. I expect that the inverse may occur if the Fed pivots and reduces the Federal Funds rate by 25-50bps. Accordingly, futures tied to the Fed’s policy rate reflect a 47% chance of a rate cut .
Economists are focused on the rising jobless rate, which sits at 4.3% as of the July employment report. In addition to this, the report suggested that fewer-than-expected jobs were added, some 89,000.
In addition to this, the rate of inflation fell to 2.5% in August , suggesting that inflation is moderating closer to the Fed’s target. Each of these factors may weigh in on the Fed’s decision to cut their key rate.
I believe that the Fed may sustain the current 5.25-5.50% range given the current state of the economy.
Though I believe that the economic activity is flirting with contractionary motive, I do not believe that business has slowed down to the point of deeming a rate cut necessary. ISM-PMI Regardless of the Fed’s decision, I do believe that the technology sector will remain resilient given the growing interest in AI applications. The top constituents of VGT include companies that are entrenched in the AI mania, whether constructing large AI factories or providing the GPUs and other interconnecting technologies to power AI training and inferencing.
Despite Nvidia’s post-earnings performance, the company’s growth trajectory remains strong as hyperscalers and enterprises continue to invest in Grace Hopper and will soon invest in Grace Blackwell architecture. Despite the firm’s high-growth potential, shares are off ~15% of their all-time-high, suggesting that investors are becoming wary of remaining invested in the $2.92T market cap company.
Conclusion VGT offers investors significant exposure to the technology sector with a high concentration in Microsoft, Nvidia, and Apple. VGT compares positively to the popular ETF QQQ, with a lower expense ratio and a higher yield. In addition to this, VGT is heavily correlated to QQQ, offering investors a similar investment outlay at a lower fee.
I recommend VGT with a BUY rating for those seeking exposure to the technology sector, with a recommended allocation between 3-5%. Before making an investment decision, make sure to consider the two events outlined in the body of the report, as they may be pivotal to the direction of the portfolio’s performance. Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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