VGT ETF Jumps 11%: Here's Why It's Still a Buy

The stock market experienced a dramatic swing in late July and early August. On July 29, the Nasdaq Composite entered correction territory, down 10.1% from its all-time high, as investors worried about increased AI spending by major tech companies like Alphabet. However, just four trading sessions later, the Nasdaq rebounded 8.8%, and the S&P 500 hit a new record high, fueled by strong earnings from Amazon and Microsoft.

During this period, the Vanguard Information Technology ETF (VGT) gained an impressive 11%. This surge was driven by a handful of megacap tech stocks, particularly Nvidia, Microsoft, Micron, and Broadcom, which together account for about 33% of the ETF's holdings. Microsoft alone jumped 26.1% in just four days, adding a staggering $757 billion in market value.

The rally was sparked by better-than-expected earnings reports and optimistic guidance from key tech companies. Microsoft, for instance, impressed investors with its cloud growth and positive fiscal 2027 outlook, despite concerns about rising AI infrastructure costs. This helped shift sentiment from fear to greed, propelling the entire sector higher.

While the rapid gains might raise eyebrows, the underlying driver is strong earnings growth. Many of these companies are growing at double-digit rates, which supports their valuations. The ETF's low expense ratio of 0.09% makes it an attractive way to gain exposure to this growth, but investors should be aware of the concentration risk in a few large names.

The recent surge in VGT highlights the power of earnings growth in driving stock prices. Despite a price-to-earnings (P/E) ratio of 36.2, the ETF's top holdings are growing earnings at impressive rates. For example, Nvidia and Broadcom continue to see strong demand for AI chips, while Micron benefits from memory chip supply constraints. This earnings momentum can make even expensive stocks look cheap over the long term.

For investors, this means that focusing solely on valuation metrics like P/E can be misleading. A company with a high P/E but robust earnings growth may be a better investment than a cheaper stock with stagnant earnings. The tech sector's ability to innovate and adapt to new trends, from cloud computing to AI, has historically rewarded patient investors.

However, the concentration of VGT in a few megacap stocks is a double-edged sword. While it can amplify gains, it also increases risk. If one of these giants stumbles, the ETF could suffer. Investors should consider their risk tolerance and investment horizon before diving in.

Despite these risks, the article argues that VGT remains a top buy because the underlying companies are high-quality with strong competitive advantages. The tech sector has consistently outperformed the broader market over the past decade, and there's no sign of that changing soon.