Can This Popular Vanguard Tech ETF Trounce the S&P 500 Again in 2025?

Exchange-traded funds (ETFs) have transformed the investing landscape since their 1993 debut, attracting investors with their straightforward approach to diversification. By allowing individuals to buy shares that track entire market indexes or sectors, ETFs eliminate the challenge and risk of selecting individual stocks while keeping costs minimal.

The technology sector particularly exemplifies the power of ETF investing in the years following the 2008 financial crisis. As digital innovation has fundamentally altered how we communicate, work, and live -- from the rise of social media to the recent breakthroughs in artificial intelligence (AI) -- tech-focused ETFs have delivered exceptional returns since the financial crisis while providing investors broad exposure to this transformative industry.

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The Vanguard Information Technology ETF (NYSEMKT: VGT) has been a particularly potent investing vehicle since its 2004 debut, turning the digital revolution into market-beating gains. Beyond consistent market outperformance, the fund's rock-bottom expense ratio of 0.10% maximizes investor returns, compared to the industry average of 0.93%.

The fund's stellar performance in 2024 reinforces its winning strategy. While the S&P 500 posted an exceptional 25% total return (including dividends), the Vanguard Information Technology ETF delivered an even more remarkable 29.3% gain to shareholders.

VGT Total Return Level data by YCharts.

Can this popular Vanguard tech ETF outperform yet again in 2025? Let's dig deeper to find out.

Market outlook

At the start of the year, Wall Street's consensus projected a roughly 10% total return (including dividends) for the benchmark S&P 500. While a lot has transpired since these projections were made -- Trump has taken office, DeepSeek shook the AI world -- this 10% figure gives us a benchmark to gauge the attractiveness of the Vanguard Information Technology ETF in 2025.

Historically, the Vanguard Information Technology ETF has averaged a total annual return of 13.7% since its inception 21 years ago. That figure implies the fund should beat out the S&P 500 again in 2025, but a deeper look suggests this year may not be typical for the ETF from a performance standpoint.

Portfolio composition and valuation concerns

An analysis of the fund's portfolio structure reveals why its historical performance trajectory may shift in the coming year. The fund maintains significant concentration risk, with 45% of its assets allocated to three technology leaders: Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA), and Microsoft (NASDAQ: MSFT).

While analysts project robust double-digit revenue growth for both Nvidia and Microsoft in 2025, their current valuations -- with forward price-to-earnings ratios (P/Es) above 30 -- suggest much of this anticipated growth is already reflected in their stock prices.

Apple presents additional concerns heading into 2025. The company's recent decision to integrate ChatGPT through an OpenAI partnership across its operating systems marks a departure from its traditional innovation leadership. This strategic pivot toward following rather than setting AI trends could potentially erode Apple's premium market positioning.

Given these factors -- the elevated valuations of Nvidia and Microsoft, combined with Apple's strategic challenges -- the fund's largest holdings may struggle to deliver the market-beating returns investors have come to expect. This concentration in potentially overvalued assets introduces meaningful risk to the fund's near-term performance outlook.

Growth catalysts and market dynamics

The emergence of DeepSeek's cost-effective AI models has sparked debate about the massive AI investments planned by U.S. technology leaders. While these companies continue to commit trillions to AI development, DeepSeek's breakthrough raises questions about the necessity of such extensive capital deployment.

This development marks a pivotal moment in AI's evolution. Chinese companies have demonstrated their abilities to create capable chatbots without relying on the most advanced semiconductor technology.

However, pursuing artificial general intelligence (AGI) still depends heavily on specialized AI processors, a market where Nvidia maintains clear technological leadership. This dynamic creates an intriguing tension between emerging cost-efficient approaches and the continued value of cutting-edge hardware infrastructure.

While the U.S. pursuit of AGI should continue driving robust revenue growth for Microsoft and Nvidia, the accelerating pace of Chinese AI development introduces new strategic and competitive risks. This evolving landscape suggests that even market leaders must navigate an increasingly complex technological and geopolitical environment.

Investment outlook

The Vanguard Information Technology ETF enters 2025 in unfamiliar territory. Unlike its consistent market-beating performance since the 2008 financial crisis, the fund now faces unique challenges. The AI landscape has grown more complex, with Chinese developments like DeepSeek demonstrating that competitive language models can be built without cutting-edge semiconductor technology.

While DeepSeek may ultimately prove less capable than the sophisticated models from Anthropic, Alphabet, and OpenAI -- and the pursuit of AGI will likely continue to require Nvidia's advanced AI processors -- the broader investment thesis has shifted. For the first time in over fifteen years, this widely held Vanguard fund no longer presents the compelling case for outperformance that investors have come to expect.

This uncertainty doesn't necessarily signal underperformance but suggests a more nuanced risk-reward profile that investors should carefully evaluate against their portfolio objectives.

Taking the long view

While the Vanguard Information Technology ETF may face near-term headwinds in 2025, its long-term growth potential remains compelling. Artificial intelligence represents a genuine technological revolution, rather than a passing trend, with its transformative effects already visible across industries and societies.

The economic impact of AI is expected to be profound, with projections suggesting it could generate trillions in global economic value by 2030. This fundamental shift in the technological landscape makes the Vanguard Information Technology ETF an attractive long-term investment opportunity, even as it navigates temporary uncertainties. The fund's exposure to key players in the AI revolution positions it well to capture substantial value creation over the next decade and beyond.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. George Budwell has positions in Apple, Microsoft, Nvidia, and Vanguard World Fund-Vanguard Information Technology ETF. The Motley Fool has positions in and recommends Alphabet, Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.