The S&P 500 (^GSPC -1.54%) entered its current bull market in October 2022, and has since advanced 65%, led by a technology-sector gain of 130%. But equity analyst Dan Ives at Wedbush says the bull market will run for another two to three years, and he believes technology stocks could soar 25% in 2025.
Ives sees tremendous investments in artificial intelligence (AI) as the driving force behind that momentum. He recently told CNBC the consensus among Wall Street analysts likely underestimates AI spending by 30% to 40%. Investors can position their portfolios to benefit from that upside by owning the Vanguard Information Technology ETF (VGT -2.13%).
Here are the important details.
The Vanguard Information Technology ETF
The Vanguard Information Technology ETF measures the performance of 316 stocks in the technology sector. Those companies fall into three categories: (1) chipmakers and semiconductor equipment manufacturers, (2) cloud services and software companies, and (3) hardware and equipment manufacturers. The five largest holdings in the index fund are listed by weight below:
- Apple: 16.2%
- Nvidia: 15.4%
- Microsoft: 13.1%
- Broadcom: 4.1%
- Salesforce: 1.9%
The Vanguard Information Technology ETF returned 158% during the last five years, which is equivalent to 20.8% annually. Comparatively, the S&P 500 returned 96% in the same period, compounding at 14.4% annually. The Vanguard ETF may continue to beat the broader market as spending on artificial intelligence (AI) increases.
Consider the five largest holdings: Apple has added AI features to newer devices that could drive a massive iPhone upgrade cycle. Nvidia GPUs are the chips of choice for accelerating AI applications in data centers. Microsoft's AI sales are on pace to hit $10 billion faster than any product category in company history. Broadcom is the leader in custom AI chips. And Salesforce recently introduced AI-powered digital workers.
The last item of consequence is the expense ratio. The Vanguard Information Technology ETF has an expense ratio of 0.1%, meaning the annual fees will total $10 on every $10,000 invested in the fund. That is well below the average expense ratio of 0.48% for index ETFs, according to Morningstar.
Technology stocks are expensive, but some premium is justified
Some investors may worry technology stocks are expensive. With a forward price-to-earnings (PE) ratio of 29, technology is the most richly valued of the 11 stock market sectors. But that premium is justified. Technology companies in aggregate are expected to report 23% earnings growth in 2025, which exceeds the forecast for every other sector.
Moreover, that trend has persisted for over a decade. Goldman Sachs analysts recently wrote, "The global tech sector's earnings per share have risen about 400% from its peak before the great financial crisis, while all other sectors together have risen 25% during that span." So, technology stocks have premium valuations because they have consistently led the market in earnings growth.
Here is the bottom line: The Vanguard Information Technology ETF provides cheap and easy exposure to many of the most influential technology stocks in the world. Incidentally, it also provides concentrated exposure to the market sector that generated the best returns over the last three, five, and 10 years. And that momentum may persist for many more years as AI unlocks new revenue streams for technology companies.
In that context, the technology sector may return 25% in 2025 as Dan Ives forecasts. But investors should only buy a position in the Vanguard Information Technology ETF if their time horizon is at least three to five years.
