An ETF has recently surpassed its highest record value - is it still worth investing?
Vanguard Information Technology ETF: A Volatile but Potentially Rewarding Investment
Investors are keeping a close eye on the market, with concerns that it may dip from its current highs. Amidst this uncertainty, the Vanguard Information Technology ETF (VGT) could be an appealing option for those seeking long-term growth in the technology sector, despite its higher volatility.
The VGT is a diversified ETF containing blue chip industry leaders and smaller corporations, with a focus on the technology sector. Despite a major slump in 2022, holding the VGT through the market's rough patches would have resulted in total returns of more than 50% by July 2022. This resilience, coupled with its recent surge of 46% since April 2022, suggests that the ETF has been able to weather market fluctuations effectively.
As of July 21, 2022, the VGT is trading at around $686 per share. The ETF's long-term total return of approximately +490% over the past 10 years reflects the strong growth in the technology sector during this period. However, its beta of about 1.23 indicates that it is more volatile than the broader market.
The ETF's 3-year Sharpe ratio of around 0.7 to 0.9 suggests a reasonable risk-adjusted return in recent years. VGT has a price/earnings ratio around 27.4, a low management fee of 0.03%, and a small dividend yield (~0.45%). Daily trading volume and bid-ask spreads indicate good liquidity, and the fund has nearly $98.5 billion in assets under management, reflecting its large size and investor demand.
However, it's important to note that the VGT's returns are largely driven by major technology companies, which have surged over the past decade. This means that investors should expect higher cyclicality compared to broader equity ETFs. The ETF tends to have high volatility, with an annualized volatility of about 18.3%. As of recent data, it has hovered near its 52-week highs, showing a pullback of just -0.21% from its all-time high.
Investing in the stock market does not result in a loss unless the investments are sold for less than the original purchase price. However, the current price of the VGT is considered expensive, and the biggest risk to consider when investing at peak prices is significant short-term volatility.
Tech stocks and ETFs tend to be hit harder during periods of volatility, and it's wise to avoid investing any cash you might need in the next several years when investing in a tech ETF. The VGT contains an additional 316 holdings from all areas of the tech sector, with Nvidia, Apple, and Microsoft making up close to 45% of the entire ETF.
It's essential to remember that past performance does not guarantee future returns for the VGT. The S&P 500 has returned 27% in the same time period, and there's no certainty about what the market will do over the coming weeks or months.
In conclusion, the Vanguard Information Technology ETF offers strong long-term growth with some higher volatility, performing well during technology-led market expansions while experiencing sharper but typically temporary declines at market peaks related to tech sector corrections. This makes it a suitable core holding for those seeking long-term tech sector exposure with an appetite for higher risk and volatility.
The Vanguard Information Technology ETF focuses on the technology sector, attracting investors seeking long-term growth in this field. The ETF's volatility, as indicated by its beta of about 1.23, makes it more volatile than the broader market. The ETF's high volatility might be a concern for investors, considering the current expensive price of the VGT could lead to significant short-term fluctuations in the market. Despite the risks, the ETF's potential for strong long-term growth, with its history of responding effectively to market fluctuations and its substantial returns over the past decade, makes it an appealing option for those with an appetite for higher risk and volatility, particularly those seeking core holdings for long-term tech sector exposure. Investing in the stock market doesn't result in a loss unless the investments are sold for less than the original purchase price, but uncertainty remains about future market movements and their potential impact on the Vanguard Information Technology ETF.
