Vanguard's Tech ETF Is About 10% Below Its Record. History Says What Usually Comes Next.

The Vanguard Information Technology ETF (NYSEMKT:VGT) closed at $129.80 on Oct. 6, its record close. As I write, it sits around $117, about 10% under that price.

The fund lost about 4% on Friday alone, and Intel, one of the tech firms it owns, was down more than 25% after the chipmaker posted third-quarter results on Thursday.

But a slide like this is nothing new for the fund. By my count, VGT has closed at least 10% under a previous record on 19 separate occasions in daily price data going back to January 2004, counting just one close per drop until the fund hit its next record.

Seventeen of those are old enough to check a full year later. The fund finished that year higher in 14 of them, and the median result was a rise of around 21%. These numbers use only daily closing prices (no dividends), adjusted for the fund's 8-for-1 share split in April.

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Higher a year later in 14 of 17

The 19 drops came in 2004 (March 22), 2006 (May 23), 2007 (Nov. 12), 2011 (June 15), 2012 (May 17 and Nov. 8), 2015 (Aug. 24), 2016 (Jan. 7), 2018 (Feb. 8 and Oct. 24), 2019 (June 3), 2020 (Feb. 25 and Sept. 8), 2021 (March 8), 2022 (Jan. 19), 2024 (Aug. 2), 2025 (March 3 and Nov. 20), and 2026 (June 10). The last two are too recent to score.

Some of the rebounds were huge. The fund climbed around 44% over the year after its Feb. 25, 2020, close, early in the pandemic, and about 42% after the Sept. 8, 2020, drop.

Of course, not all worked out. The three misses were March 2004 (down around 2% a year later), November 2007 (down about 44%), and January 2022 (down about 21%).

And the wait for a new record was often short. For all 19 cases, the median gap between the 10% close and the next record close was around four months.

Is a 10% drop a better time to buy?

Not by much, it seems. Using every trading day since 2004 with a full year of data after it, the fund climbed over the next 12 months around 82% of the time. The median gain was about 16%.

In other words, 14 of 17 (also around 82%) matches the fund's usual hit rate. The drops have arguably come with a somewhat bigger median gain, but they haven't improved the odds. After all, a fund full of growth stocks has risen over most 12-month periods since 2004.

The bad years got far worse

But the record does show where the losses came from. In 13 of the 19 cases, the fund hit bottom between 10% and 20% below its record before rebounding. The other six dropped over 20%, and all three losing years came from this group.

November 2007 was the worst. The fund kept sinking through the financial crisis and sat around 55% below its record by November 2008. It took until January 2011 to reach a new record. The January 2022 drop also turned into something bigger. The Federal Reserve started raising its benchmark interest rate in March 2022, and by mid-October, the fund was about 35% below its December 2021 record. Its next record close came in December 2023.

Rates are rising again

That 2022 case is the one I'd follow most closely now. The Fed lifted its target range by a quarter point to 3.75% to 4% on Sept. 16 and kept it there at its Oct. 28 meeting. Higher interest rates can hurt the valuations of fast-growing businesses in particular.

And this fund isn't cheap. As of Sept. 30, its stocks traded at around 33 times earnings, compared to about 25 times earnings for the stocks in the Vanguard S&P 500 ETF.

It's also concentrated. Nvidia, Apple, and Microsoft made up about 45% of its assets at the end of September. Nvidia alone was about 18%, so a few businesses' results can move the whole fund.

Does a near-10% drop tell investors much, then? On this fund's record, I don't think so. The odds of a gain a year later looked about the same as on any other day. And the two big losses came when a pullback became a bear market (a fall of 20% or more), something the first 10% couldn't reveal.

So, I'd hold the fund through this rather than sell it. But with the Fed raising rates again and the fund's valuation well over the broader market's, I don't see this drop as a bargain yet.

Daniel Sparks and his clients have positions in Apple. The Motley Fool has positions in and recommends Apple, Intel, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.