The best friend that any investor has is time. The longer the time horizon, the more time you have to make your money and the markets work for you. Just look at the performance of the S&P 500. Between December 1, 2010 and December 1, 2020, the S&P 500 increased by about 200%, or about 11.6% on an annualized basis.
So, if you had invested, say, $ 10,000 in a fund traded on the S&P 500, or ETF, 10 years ago this month, you would have about $ 50,000 now, with $ 100 in contributions each month.
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But this is for an ETF that tracks the broad S&P 500. With the luxury of time, you can feel more secure in investing in a more aggressive segment of the market to face the short-term ups and downs of the market. Let’s say you have a big expense decreasing ten years later, like your son or daughter’s college education. If you invested $ 10,000 in an aggressive growth ETF, you would probably have enough to pay a large portion of the college bill. A great option to achieve this goal is the Vanguard Information Technology ETF (NYSEMKT: VGT).
Vanguard Information Technology ETF has important competitive advantages
The Vanguard Information Technology ETF is one of the oldest, largest and best performing ETFs on the market. It has existed since 2004 and has accumulated $ 40.6 billion in assets, making it the second largest technology-focused ETF. It comes with a very specific index, the MSCI US IMI Information Technology 25/50 Index. If this is not a familiar index for you, you are not alone.
The index tracks the information technology sector, but with one difference: it applies certain investment limits imposed on funds to promote greater diversification. One of the requirements is that at the end of each quarter, no more than 25% of the value of a company’s assets can be invested in a single issuer. Another is that the sum of the weights of all issuers that represent more than 5% of the fund must not exceed 50% of the fund’s total assets. That’s where the 25/50 comes in the name of the index.
This allows this ETF to capture a wider range of the IT stock universe. Currently, it has almost 350 participations, including large, medium and small capitalization shares. This is more diversified than some of its peers, which follow more concentrated indexes. This translates to ETF with a lower beta and standard deviation – two risk measures – than most of its competitors. In addition, it has a small proportion of expenses of 0.10%, which is much lower than most of its competitors.
$ 10,000 investment growth
This ETF has had an annual return of 12.9% since the beginning, but over the 10 years since December 1, 2010, it has registered an average annual return of 20.5%. If you invested $ 10,000 10 years ago this time, you would now have about $ 99,000 – investing $ 100 a month. Depending on where your child attends college, this can pay for all four years of tuition at some state schools and at least a year or two at most private institutions.
It is clear that past performance is no guarantee of future results, as the disclaimer says, and the past 10 years have been historically strong for the IT sector.
The sector is also among the strongest during the pandemic, as technology was instrumental in adapting to social distancing protocols. Although some companies have seen their shares rise very high, very fast and could see a setback, in the long run the sector will continue to lead the market in the next decade. While the pandemic will hopefully be a thing of the past in 2021, many of the protocols will remain part of a new normal, driven by technology. Not to mention all the new emerging technologies that we will see, such as artificial intelligence (AI), further transform the way we communicate.
So, take the time – and an investment in a cheap and relatively stable ETF that could produce the kind of returns to put your child in college.