Meet the Vanguard ETF That Has Crushed the S&P 500 Over the Last 10 Years

Over the past century, the S&P 500 has generated an average annual return of around 10%. Over the past decade, however, the Vanguard S&P 500 ETF (NYSEMKT: VOO) has averaged a 15% annual return, which happens to still include the 2020 COVID pandemic shock and the 2022 bear market.

It's safe to say that investors are currently enjoying one of the better times in stock market history. Some ETFs, of course, have performed even better. Much better.

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Thanks to the artificial intelligence (AI) boom, tech stocks have been roaring. At first, rallying on potential, that boom has produced tangible results, turning tech into one of the economy's biggest earnings growth engines.

That's helped turn the Vanguard Information Technology ETF (NYSEMKT: VGT) into one of the decade's biggest winners. In the past 10 years, it's returned roughly 25% annually.

VGT Total Return Price data by YCharts

The pros of VGT

Over longer holding periods, this is the sector that tends to produce the world's biggest advances and innovations. That dynamic alone lends it to being one of the highest-potential growth sectors in the entire economy.

We saw it a quarter-century ago with the advent of the internet. We've seen it recently with artificial intelligence. We've seen it in between with things like the evolution of cybersecurity and space travel. These kinds of revolutions have traditionally produced multi-year bull markets that can reward long-term shareholders.

The cons of VGT

The short term can be very volatile. Sudden drawdowns of 10% or more aren't uncommon (the VanEck Semiconductor ETF (NASDAQ: SMH) just fell by 12% over the span of two weeks). In extreme cases like the tech bubble, this sector can crash from over-inflated levels.

Today, concentration has become a big risk. The Vanguard Information Technology ETF has more than 30% of its assets invested in the combination of Nvidia and Apple. The top 10 holdings account for around 60% of the fund. Even in the broader S&P 500, tech is nearly 40% of the index.

Even when investors think they're diversifying, they're still investing heavily in tech stocks. Given the rally we've seen over the past few years, a lot of people are exposed to above-average drawdown risk.

VGT is a solid long-term holding

When weighing both the upside and downside, the Vanguard Information Technology ETF is one of the best funds targeting the tech sector. But it's definitely meant for long-term holding periods to ride out short-term volatility.

The underlying innovation narrative will probably always be in place for tech stocks. But it's worth taking your time getting there.

David Dierking has positions in Apple. The Motley Fool has positions in and recommends Apple, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.