Investing in technology and semiconductor stocks has produced extraordinary returns for investors in recent years. As companies invest heavily in artificial intelligence (AI) and upgrade their existing infrastructure, demand for a wide range of technology-related products and services is increasing.

But the real challenge for investors is determining which tech stocks to own. Valuations are high for some promising stocks, while others may not yet be profitable or generate high levels of growth. One way to offset these growth opportunities while keeping your risk relatively low is to invest in an exchange-traded fund (ETF). It is an ideal option for long-term investors. Vanguard Information Technology ETF (VGT -0.18%).

This Vanguard fund has outperformed the S&P 500 over the past five years

Given the excitement surrounding technology, it may come as little surprise that the tech-heavy Vanguard Information Technology ETF provides better returns for investors than simply mirroring the market return. S&P 500. Its total return of approximately 170% (including dividends) is much higher than what investors would earn with the broader index.

^SPX data Y Charts

When looking at the top holdings in the Vanguard fund, it’s not surprising to see why it’s outperforming the S&P 500. Apple, MicrosoftAnd Nvidia They are its three largest holdings and together make up 44% of the ETF’s total weight. While the fund is well-diversified and includes more than 300 stocks in total, with such heavy exposure to just three stocks, how they perform will largely determine how the fund performs. And Nvidia’s 2,500% return over the last five years has undoubtedly given the fund a significant boost.

Why it might not be too late to invest in ETFs

Although the Vanguard Information Technology ETF has made significant gains in a relatively short period of time, there is still room for the fund to continue gaining value. That’s because there’s still likely to be a lot of AI-related spending, which could lead to strong earnings for many top companies. technology stocks. While Nvidia may not be able to replicate its returns over the next five years, other stocks could fill the gap and allow the Vanguard fund to climb higher.

technological research company Gartner’s predicts that worldwide semiconductor revenue will grow 14% next year, with the market valued at approximately $716.7 billion. In the long term, the Grand View Research project predicts that the entire AI market will expand globally at a compound annual growth rate of 36.6% by the end of the decade.

While estimates vary, one thing is clear: Spending on AI will likely increase in the near future. This means the Vanguard Information Technology ETF, which has benefited from AI-related spending, could have further upside potential despite its already strong gains.

Should you add the Vanguard Information Technology ETF to your portfolio today?

If you want access to the best technology stocks, Vanguard Information Technology ETF can provide you with a good mix of investments for a relatively low fee. expense ratio 0.10%. But our caveat is that you should be comfortable with the fund’s heavy exposure to the three largest and most valuable stocks in the world; this could be potentially vulnerable to corrections in the near future.

As long as you’re willing to hold the fund for a few years, I think it can still be a good investment to buy and hold. But you should also expect some volatility, given the impressive gains tech stocks have accumulated in recent years and the potential for adjustments in the premiums investors might be willing to pay for them in the future.