Forget the Dow Jones – buy this magnificent ETF

If you have even a passing interest in stock markets and indices, you may be familiar with the Dow Jones Industrial Average. It’s often seen as a proxy for the entire US stock market, but it really shouldn’t be.

You should also know that it’s smart to invest in index funds, and that’s true. But don’t look for an index fund that tracks the Dow Jones. Instead, here’s an index fund with a stronger track record and a brighter future.

What’s wrong with the Dow Jones Industrial Average?

Here’s what else might surprise you about the “Dow”: it only includes 30 stocks. The stock index debuted in 1896, when it only covered 12 actions. But today their holdings vary between Amazon.com It is American Express for Wal-Mart It is Walt Disney. It aims to represent the US economy, but with just 30 entries, many important companies are excluded, such as Google’s parent company AlphabetWarren Buffett Berkshire HathawayIt is Bank of America.

Another problem with the Dow is that it is price-weighted; its value is an average of the share prices of all its components. (It’s a little more complicated than that, involving a “divider.”) O S&P 500 The index, a much more representative index of the U.S. economy, is “market-weighted,” meaning its components are weighted by their market value, so the largest companies in the index, such as Microsoft, LitterIt is Nvidiacarry the greatest influence.

With the Dow, it’s the stocks with the highest prices that are most influential, so UnitedHealth Groupwith a recent share price close to $500, it will influence the index about 10 times more than Cisco Systemswith its recent price close to $46 per share, even though UnitedHealth is only about two and a half times larger than Cisco.

The Dow Jones as an investment

You can invest in the Dow if you want, and an important way to do this is through SPDR Dow Jones Industrial Average ETF (DAY). Its performance has not been too bad in the long term, recording average annual gains of 11.05% over the last decade and 12.92% over the last 15 years. Still, you can do better, especially since the Dow’s weighting system is so arbitrary. So maybe skip the Dow in favor of the ETF below.

Discover the Vanguard Information Technology ETF

O Vanguard Information Technology ETF (NYSEMKT:VGT) has a lot to offer investors looking for solid long-term growth. (Remember that in the short term, the stock market in general is unpredictable and can rise or fall sharply in any given year, also leading to index funds tracking it up or down sharply.)

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For starters, the Vanguard Information Technology ETF features a low “expense ratio,” or annual fee, of just 0.10%. So if you invest $1,000 in this, you’ll pay about $1 a year in fees. Check out its past performance and how it compares to the Dow ETF as well as a large S&P 500 ETF:

Source: Morningstar.com and Yahoo.com as of June 15, 2024.

Impressive, right? Keep in mind that the stock market in general has averaged annual gains of about 10% over long periods. The above returns even exceed the 15% returns. Of course, you can’t count on repeating past performance – it all depends on the performance of your components. So what are its components? Glad you asked!

What’s in the Vanguard Information Technology ETF?

In Vanguard’s own words, this ETF “seeks to track the performance of a benchmark index that measures the return on investment in stocks in the information technology sector”. And “includes shares of companies that serve the electronics and computer industries or that manufacture products based on the latest applied science.”

It recently covered 313 stocks, and these were the top 10 at the end of April:

Source: Vanguarda.

You can see that there is a wide variety of companies focused on technology, with giants exerting a lot of influence. That’s not necessarily a bad thing (and some other high-tech ETFs have the same companies even more heavily weighted). After all, these big companies became huge through good performance and simple growth, and that’s what we all want our portfolio holdings to do.

So consider adding shares of the Vanguard Information Technology ETF to your portfolio if it makes sense for you – if you’re optimistic about the growth potential of the types of companies it’s invested in. Be prepared for it to be more volatile than, say, a Dow-focused ETF or even an S&P 500 index fund. But you can also expect higher returns than those funds would provide.

Should you invest $1,000 in the Vanguard World Fund – Vanguard Information Technology ETF right now?

Before purchasing shares of the Vanguard World Fund – Vanguard Information Technology ETF, consider the following:

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. American Express is an advertising partner of The Ascent, a Motley Fool company. Selena Maranjian has positions in Adobe, Alphabet, Amazon, American Express, Apple, Bank of America, Berkshire Hathaway, Microsoft, Nvidia, Oracle, Salesforce and Walt Disney. The Motley Fool holds positions and recommends Accenture Plc, Adobe, Advanced Micro Devices, Alphabet, Amazon, Apple, Bank of America, Berkshire Hathaway, Cisco Systems, Microsoft, Nvidia, Oracle, Salesforce, Walmart, and Walt Disney. The Motley Fool recommends Broadcom and UnitedHealth Group and recommends the following options: long January 2025 $290 calls on Accenture Plc, long January 2026 $395 calls on Microsoft, short January 2025 $395 calls 310 on Accenture Plc and January 2026 $405 short calls on Microsoft. The motley fool has a disclosure policy.

Forget the Dow Jones – buy this magnificent ETF was originally published by The Motley Fool