The S&P 500 index, which is composed of 500 companies across 11 different economic sectors, has the information technology sector as its largest component, making up 29.9% of the index’s total value. Recently, the S&P 500 experienced a decline of 19% from its peak to its lowest point, nearly entering a bear market, defined by a 20% decrease. In contrast, the S&P 500 Information Technology index fell by 26%, officially crossing into bear market territory. Major companies like Apple, Microsoft, and Nvidia are prominent in this sector, serving as indicators of the performance of some of the most valuable U.S. companies.
The Vanguard Information Technology ETF (VGT), which invests solely in stocks from the information technology sector, including those inside and outside the S&P 500, has consistently outperformed the S&P 500 annually since its inception in 2004. As a result, investors may consider purchasing a share in this fund, particularly while it is trading below its usual value amid the current technology bear market.
On April 2, President Trump announced a plan to implement a comprehensive 10% tariff on all physical products imported into the United States, alongside higher reciprocal tariffs on goods from certain countries. While these reciprocal tariffs have been paused for 90 days pending negotiations, tariffs on Chinese imports remain active. These extensive tariffs have led to an immediate increase in consumer living costs, potentially hindering U.S. economic growth. Some countries have retaliated with their own tariffs, impacting U.S. exporters and negatively affecting corporate earnings, contributing to the sharp recent decline of the S&P 500.
However, many products and services from the information technology sector are not directly impacted by these tariffs. This has led to the belief that the sector’s underperformance relative to the S&P 500 presents a significant opportunity for investors. For instance, semiconductors, including AI chips produced by companies like Nvidia and Broadcom, were initially excluded from the tariffs. Additionally, Microsoft, which offers digital products such as the Windows operating system and Office 365, and cloud services through Azure, is not currently affected by the tariffs. Furthermore, President Trump announced that smartphones and computers are to be removed from the ongoing reciprocal tariffs on imports from China, significantly benefiting Apple, which manufactures around 90% of its iPhones there.
The Vanguard Information Technology ETF includes stocks that focus on software, cloud services, digital products, or products exempt from tariffs like semiconductors. Key holdings and their portfolio weights in this ETF are Salesforce (1.78%), Oracle (1.72%), Accenture (1.38%), Adobe (1.22%), Palantir Technologies (1.13%), Qualcomm (1.12%), Advanced Micro Devices (1.02%), Palo Alto Networks (0.81%), Micron Technology (0.68%), and CrowdStrike (0.63%). Including Apple, Microsoft, Nvidia, and Broadcom, these companies account for 61.7% of the ETF’s total value.
While the mentioned companies might avoid direct tariff impacts, they could face indirect consequences from the trade policies, potentially experiencing decreased demand if the U.S. economy slows. Companies like Nvidia, Broadcom, and AMD, which depend on significant spending from a limited customer base annually, could see pronounced effects.
Despite some risks being priced into the stock values—illustrated by Nvidia’s 25% drop from its peak—there may be reduced downside risk for investors purchasing the Vanguard ETF now. The ETF’s performance has been strong against the S&P 500 over the long term, with a compound annual return of 12.8% since 2004, compared to the S&P 500’s average annual gain of 9.6%. Although the ETF was recently down by 27% from its record high, it maintains a notable track record of outperforming the broader market over time.
Even amidst economic slowdowns potentially caused by global trade tensions, quality stocks like Apple, Microsoft, and Nvidia may remain attractive investments due to their solid financial standing, consistent earnings, and leadership within their sectors. Additionally, the anticipated growth of artificial intelligence, predicted to add $15.7 trillion to the global economy by 2030, could drive value creation within the information technology sector. Thus, the Vanguard Information Technology ETF might be a promising investment during the ongoing tech bear market.
