1 Vanguard Index Fund to Buy to Beat the S&P 500 as the Artificial Intelligence (AI) Boom Unfolds

The S&P 500 (SNPINDEX: ^GSPC) Tracks the performance of 500 large-cap stocks, covering about 80% of U.S. stocks and about 50% of global stocks by market value. The index includes many of the world's most influential companies and investors often use it as a performance benchmark for their own portfolios.

However, most investors fail to outperform the S&P 500 over long periods of time. Even professional asset managers usually come up short. In fact, 90% of large-cap funds underperformed the benchmark index over the last 10 years. But investors could beat the odds with a technology-focused index fund.

The Vanguard Information Technology ETF (NYSEMKT:VGT) has more than doubled the S&P 500's gains over the last decade, and the above-average returns could continue as spending on artificial intelligence surges in the coming years. Here's what investors should know:

The S&P 500 includes companies from 11 stock market sectors, but a single sector has accounted for a large percentage of the index's gains in recent years. “The technology sector has generated 32% of global equity returns and 40% of U.S. stock market returns since 2010,” it said Goldman Sachs.

The graphic below further illustrates this point. It compares the total return of the technology sector with the total return of the S&P 500 over various time periods. Note that technology stocks have often doubled gains in the index.

Total return	Technology sector	S&P 500
3 years	68%	36%
5 years	225%	110%
10 years	720%	275%
20 years	1,810%	677%

Source: YCharts.

Importantly, the technology sector's outperformance is not due to hype or irrational valuations, but rather to solid financial fundamentals. “Earnings per share for the global technology sector are up about 400% from their peak before the Great Financial Crisis, while all other sectors combined are up 25% over that period,” according to Goldman Sachs.

The Vanguard Information Technology ETF tracks 316 technology stocks that fall into four broad categories: (1) chipmakers and semiconductor equipment makers, (2) cloud infrastructure and platform services providers, (3) software providers, and (4) hardware and device makers . Below are the fund's five largest holdings by weight.

Apple: 16%
Microsoft: 14%
Nvidia: 13.9%
Broadcom: 4.6%
Oracle: 1.8%

The technology sector's long-term outperformance can be attributed to the explosive growth of cloud computing, although other long-term trends have also contributed, including the proliferation of mobile devices, online shopping and streaming media. These technologies will only become more relevant, but artificial intelligence (AI) is set to be the technological shift that will shape the next decade.

In fact, Grand View Research estimates that spending on AI hardware, software and services will grow 37% annually through 2030. And the five companies listed above could be among the biggest beneficiaries of the AI boom.

Apple will equip iPhones and MacBooks with AI functions. Software updates are reportedly set to arrive on October 28, and some analysts expect a historic upgrade cycle to follow.
Microsoft is the second-largest cloud services provider and an early leader in generative AI due to its partnership with ChatGPT's inventor, OpenAI.
Nvidia is the market leader in data center graphics processing units (GPUs), chips that represent the industry standard for accelerating workloads such as AI training and inference.
Broadcom is the market leader in networking chips and custom silicon, two semiconductor categories that are expected to see strong demand as companies build out their AI infrastructure.
Oracle is the fifth-largest cloud services company and is currently building a data center that will be used to train one of the world's largest AI models.

The final point of importance is the fee structure. The Vanguard Information Technology ETF has an expense ratio of 0.1%, meaning investors pay $1 annually for every $1,000 invested in the fund. In comparison, the average index fund had an expense ratio of 0.36% in 2023 morning star.

Here's the bottom line: The Vanguard Information Technology ETF is a relatively cheap and easy way to gain exposure to stocks in the technology sector, the best-performing sector of the market in recent history. The index fund is a particularly attractive option at the moment as many technology companies are expected to benefit from the boom in artificial intelligence in the coming years.

Before you buy shares of the Vanguard World Fund – Vanguard Information Technology ETF, you should consider the following:

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Trevor Jennewine holds positions at Nvidia. The Motley Fool has positions in and recommends Apple, Goldman Sachs Group, Microsoft, Nvidia and Oracle. The Motley Fool recommends Broadcom and recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.

1 Vanguard Index Fund to Buy to Beat the S&P 500 as Artificial Intelligence (AI) Boom Unfolds was originally published by The Motley Fool

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