The Best-Performing Vanguard ETF Over the Last Decade Is Issuing an 8-for-1 Stock Split. But Should Investors Be Concerned That 44% of the ETF Is Invested in Just 3 Growth Stocks?

Vanguard, one of the largest U.S. investment management firms, recently announced forward share splits on five equity index exchange-traded funds (ETFs), effective April 21.

The splits will bring all five ETFs, currently trading at prices in the triple digits, down well below $100 a share. And since the Vanguard Information Technology ETF (NYSEMKT: VGT) has the highest price per share at $668.70 at the time of this writing, it gets the largest split at 8-for-1, compared to 4-, 5-, or 6-for-1 splits for the other ETFs.

Here's why the tech ETF could be a great buy now, and some risks worth considering.

Image source: Getty Images.

A decade of domination

The Information Technology ETF's 23% average annual return over the last 10 years is head and shoulders above the second-place Vanguard Mega Cap Growth ETF and the other 63 Vanguard stock- and sector-focused ETFs.

Here's a look at the impact of that rapid rate of compounding compared to the Nasdaq Composite (NASDAQINDEX: ^IXIC) and S&P 500 (SNPINDEX: ^GSPC).

Data by YCharts.

The formula is simple. Being heavily overweight in Nvidia (NASDAQ: NVDA), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Broadcom, and other tech stocks relative to the S&P 500 has produced outsize returns. Especially the megacap tech stocks and the semiconductor industry, which make up over a third of the Vanguard Tech ETF.

But concentration can backfire during a sectorwide sell-off. The Vanguard Tech ETF is down 11.3% year to date, which is worse than the 7.3% decline in the S&P 500. The broader software industry has been under pressure lately, as evidenced by Microsoft's 33.8% decline from its all-time high. Even red-hot semiconductor stocks like Nvidia and Broadcom are selling off. And Micron Technology is down a mind-numbing 22.3% in just the last week (as of market close on March 30).

Top growth stocks at compelling valuations

Despite including dozens of well-known growth stocks, the tech sector is concentrated in Nvidia, Apple, and Microsoft, which make up 44% of the Vanguard Tech ETF. Being heavily weighted in just a few stocks inherently adds risk to the Vanguard Tech ETF relative to other growth-focused ETFs. But the more valuations fall, the lower that risk becomes.

Consider that Microsoft's forward price-to-earnings (P/E) ratio is now just 21.5. Meanwhile, Nvidia's forward P/E is 19.9, which is below the S&P 500 forward P/E of 20.5. Just a few months ago, Microsoft and Nvidia were trading at significant premiums to the index.

Lower valuations reduce the need for quarter after quarter of blowout earnings -- which will appeal to investors who are concerned about the impact of a potential slowdown in artificial intelligence (AI) spending.

Reasons to buy the Vanguard Information Technology ETF

The Vanguard Information Technology ETF is a great buy for investors who want to build a portfolio around Nvidia, Microsoft, and Apple. It's an exceptionally good buy for investors who want a lot of exposure to the semiconductor industry, as you won't find nearly the same exposure to chip stocks in sector-agnostic growth stock ETFs. And the semiconductor industry has arguably benefited the most from AI innovation so far.

Growth stock ETFs tend to be heavily invested in megacap tech stocks. Holding a tech sector ETF amplifies that bet -- which adds concentration risk -- but can also lead to outsize gains if those top stocks continue to drive the major indexes to new heights.

Daniel Foelber has positions in Nvidia. The Motley Fool has positions in and recommends Apple, Micron Technology, Microsoft, and Nvidia and is short shares of Apple. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.