Meet the Magnificent Vanguard ETF With 37.6% of Its Portfolio Invested in Nvidia, Apple, and Microsoft

This chart features all eight American technology stocks with valuations of $1 trillion or more, and their respective returns in 2024 so far. Their average return for the year works out to around 67%. By comparison, the S&P 500 is up by just 26%. Here’s why that’s important.

NVDA data by YCharts

Those eight tech giants have a combined weighting of 35.9% in the S&P 500, meaning investors who don’t own them are almost certainly underperforming the index. Since themes like artificial intelligence (AI) will likely continue driving strong returns across the tech space, the very same scenario could play out in 2025.

Buying an exchange-traded fund (ETF) with a high level of exposure to those trillion-dollar market leaders might be a simpler option for investors compared to buying them individually. The Vanguard Mega Cap Growth ETF (MGK 1.36%) offers exactly that — more than one-third of the entire value of its portfolio is tied up in just three of the names in the chart.

Here’s why it could be a great buy for investors of all experience levels.

Image source: Getty Images.

Jam-packed full of leaders in tech and AI

The Vanguard Mega Cap Growth ETF only holds 71 stocks, and 60% of its portfolio (by value) is invested in the technology sector. That isn’t a surprise, considering its top three positions alone — Apple, Nvidia, and Microsoft — account for 37.6% of its portfolio, and each of them is in the tech sector. Those three companies are among the leaders in different segments of the AI race.

Apple could become the largest distributor of AI to consumers via its Apple Intelligence software, while Nvidia is the leading supplier of data center chips for AI development. Microsoft, on the other hand, delivers AI services in the cloud, and it also built an AI assistant called Copilot that’s driving productivity for enterprises.

But they aren’t the only influential names in this fast-growing industry. You might recognize some other popular AI stocks among the top 10 holdings in the Vanguard ETF:

Data source: Vanguard. Portfolio weightings are accurate as of Nov. 30, 2024, and are subject to change.

Amazon is the world’s largest e-commerce company. It uses AI in its fulfillment centers to drive efficiency, and it even developed an AI shopping assistant called Rufus to help customers with product queries. The company is also home to the largest cloud computing platform in the world called Amazon Web Services, which is trying to become a leading provider of AI data center infrastructure, large language models (LLMs), and AI software.

Then there is Meta Platforms, which built the world’s most popular open-source LLMs, called Llama. The models have been downloaded over 600 million times, and CEO Mark Zuckerberg thinks the upcoming Llama 4 model will be the most advanced in the industry when it launches in 2025. The company is using Llama to create new AI software features for its Facebook, Instagram, and WhatsApp social networks.

Tesla might be one of the biggest AI opportunities in the world thanks to its self-driving vehicle software, which could transform the company’s economics. Alphabet, on the other hand, developed a family of AI models called Gemini, and it’s using them to transform its flagship Google Search business.

Broadcom, Salesforce, Advanced Micro Devices, and Palo Alto Networks are just some of the other AI stocks investors will find outside the top 10 holdings in the Vanguard ETF.

But it isn’t all about AI, since pharmaceutical giant Eli Lilly and payments powerhouse Visa are two of the top positions in the ETF. It also holds other nontechnology titans like Costco Wholesale, McDonald’s, and Walt Disney, so there is some diversification.

The Vanguard ETF can help investors beat the S&P 500

The Vanguard Mega Cap Growth ETF has generated a compound annual return of 13.3% since its inception in 2007. That’s better than the average annual return of 10.2% in the S&P 500 over the same period.

The 3.1-percentage point difference might not sound like much at face value, but it makes a big difference in dollar terms thanks to the effects of compounding:

Calculations by author.

But the ETF has delivered an accelerated annual average return of 16.3% over the last decade, thanks to the widespread adoption of smartphones, cloud computing, enterprise software, and AI, which have driven an earnings boom among some of the world’s largest tech companies.

MGK data by YCharts

That brings me to my closing point. AI is shaping up to be so transformative that Morgan Stanley predicts Microsoft, Amazon, Alphabet, and Meta will invest a combined $300 billion developing the technology in 2025 alone. If it pays off, they could generate several times that amount in revenue over the next few years — but in the short term, that spending will significantly benefit hardware suppliers like Nvidia and Broadcom.

However, If AI fails to live up to the hype, each of the companies I mentioned could lose significant amounts of the value they created over the last couple of years. That could trigger a period of poor performance in the S&P 500, given their high weightings in the index, but the Vanguard ETF could fare even worse.

As a result, investors should only buy this ETF as part of a balanced portfolio of other funds and individual stocks — preferably one that isn’t already highly exposed to the AI revolution.