The Vanguard IT ETF (VGT) is up 23% YTD and 38% over the past year. It has been driven by a COVID-19 impacted market that has been rewarding the large-cap tech stocks for demonstrating excellent top- and bottom-line growth. This article will compare VGT with two leading technology ETFs and attempt to answer the most relevant question: has “big tech” come too far too fast and will there be a significant rotation out of technology and into the the more cyclical sectors, like industrials and/or materials?
Top-10 Holdings Comparison
|Apple – 23.2%||Apple – 13.22%||Adobe – 8.41%|
|Microsoft – 16.8%||Microsoft – 10.85%||Microsoft – 8.31%|
|Visa – 3.5%||Amazon – 10.84%||Salesforce – 8.23%|
|Nvidia – 3.4%||FaceBook – 4.24%||Oracle- 6.91%|
|Mastercard – 3.3%||Tesla – 3.49%||ServiceNow – 5.33%|
|Adobe – 2.6%||GooGL – 3.48%||Zoom Video – 5.29%|
|Salesforce – 2.5%||GooG – 3.38%||Intuit – 4.90%|
|PayPal – 2.4%||Nvidia – 2.75%||Activision-Blizzard – 3.76%|
|Intel – 2.2%||Adobe – 2.06%||Autodesk – 2.97%|
|Cisco Systems – 1.8%||PayPal – 1.94%||Docusign – 2.30%|
As can be seen from the list, VGT has a ~40% of its portfolio in just two stocks: Apple (OTC:APPL) and Microsoft (MSFT). That’s a big overweight ~16% more in those two stocks as compared to the QQQ. IGV doesn’t even own Apple in the top-10. Interestingly enough, VGT not only doesn’t have a large position in Amazon, it’s not in the top-10 holdings at all. Meanwhile, VGT’s top-10 bets in hardware/semiconductors (other than Apple) are with Nvidia (NVDA) Intel (INTC) and Cisco (CSCO), in aggregate only a 7.4% top-10 weighting, while Nvidia (NVDA) is the QQQ’s top semiconductor company with a 2.75% weight, that is unless you consider Tesla (TSLA) a “hardware” company. Tesla has a ~3.5% weighting in the QQQ but is not owned in VGT. IGV, as primarily a software oriented Tech fund, has none of these hardware/semiconductors company’s and holds companies like Zoom Video (ZM), Intuit (INTU), and Autodesk (ADSK) instead, with its top holding Adobe (ADBE) at 8.4% having a ~3x higher weight as compared to the VGT ETF (2.6%).
The bottom line: from the top-10 lists, it is clear that an investment in VGT is, for a supposed broad ETF, is an over-weight investment in two stocks: Apple and Microsoft. The other aspect of VGT that strikes me is the abundance of payment processors like Visa (V), Mastercard (MA), and PayPal (PYPL) in the top-10 holdings (an aggregate 9.2% of the ETF). That can be good due to the shift in online shopping, but could go south if the economy continues to sputter due to COVID-19, the high unemployment rate (8.4%), and lower consumer spending – which has started to decelerate:
Source: AP News
Other Important Metrics:
|Top-10 Holdings %||61.7%||56.3%||56.4%|
|Total Number of Holdings||328||103||100|
As can be seen in the table above all three ETF hold from ~55-60% of the total portfolio in their top-10 companies, so an investor needs to be comfortable with those top-10 picks. What’s interesting to me is that VGT has 328 companies in the portfolio, more than 3x the number of both the QQQ and IGV, yet its expense ratio – at 0.10% – is still considerably lower.
Also, it is clear that VGT is the least expensive of the three funds with P/E an Price-to-Book ratios considerably less than either QQQ or IGV. The yields are roughly equivalent and quite inconsequential when dealing with the current valuations levels of the companies held in these funds.
Surprisingly enough, over the past 12-months the performance of these three funds, despite their different portfolio compositions, are remarkably equivalent, with IGV having a slim ~2.5% advantage over VGT:
Source: Seeking Alpha Charting Tool
Most investors are aware of the “high-flying” tech sector and the apparent consensus that there needs to be a “correction” to bring them back down to Earth. Indeed, since the beginning of September, we have seen a pullback in the tech sector and it has hit these funds, but the pullback has been fairly mild despite all the headlines:
Source: Seeking Alpha Charting Tool
Surprisingly enough, IGV – the more software oriented and arguably more over-priced fund (in terms of P/E and P/B, see above) as compared to VGT has actually held up ~5% better over the past month.
Where we go from here is anyone’s guess. With all the uncertainty – from the upcoming election, the US/China trade war, and COVID-19 to the overall…