1 ETF I wouldn’t touch with a 10-foot pole

Since they were introduced to the stock market in the 1990s, exchange-traded funds (ETFs) have been among the most useful tools for investors. They offer all the broad market exposure of mutual funds, but come in a more investor-friendly package — their fees are usually lower and they can be bought and sold in a brokerage account just like stocks. Investing made simple.

There are countless ETFs on the stock market, covering virtually any sector, industry, interest or theme you might be interested in. Whether it’s technology, cannabis, or space exploration, if you want to find an ETF for it, you probably can. That said, not all ETFs are equally useful, and some are worth avoiding.

One ETF in particular that I wouldn’t touch with a 10-foot pole right now is Vanguard Information Technology ETF (NYSEMKT:VGT) — even with his recent success.

Too few companies are at the top

This 320-stock ETF contains large-, mid-, and small-cap companies in the information technology sector. The specialties of these companies include semiconductors (29.9% of the ETF), systems software (22.2%), hardware and storage technology (18.1%), application software (13.4%), communications equipment (3 .1%) and several others.

Because the ETF is weighted by market capitalization, larger companies have more leverage than smaller companies. Unfortunately, that’s part of the problem. Here are the ETF’s top three holdings and how much of the fund they make up:

• Microsoft (NASDAQ: MSFT): 16.66%

• Apple (NASDAQ:AAPL): 16.07%

• Nvidia (NASDAQ: NVDA): 14.63%

Three companies that represent less than 1% of the ETF’s companies account for more than 47% of its weight. There is a lack of diversification and then there is this.

When it’s great, it’s great; when it’s not, it’s bad

It’s fair to say that the ETF has been tremendously successful over the past decade, far outperforming the three major US stock market indexes. In fact, none of the indexes came even close to the ETF’s returns over this period.

It’s also fair to admit that Microsoft, Apple and Nvidia are three of the best companies in the world. Microsoft has been at the top of the tech food chain for nearly 50 years, Apple is arguably the gold standard for consumer electronics, and Nvidia is one of the companies at the forefront of AI technology.

However, as the saying goes, “The same thing that makes you laugh can make you cry.” The success of the three companies above has pushed the index forward over the past decade, but any period of decline in the three could hurt the ETF’s performance. For example, let’s look at the last month when the three companies experienced a pullback.

The story continues

Of course, Microsoft, Apple and Nvidia aren’t the only ones responsible for the ETF’s decline during this period. But given how much of this is their downfall, they bear a decent share of the blame. As they go, so goes the ETF.

Do I expect these three companies to have bad years? Not at all. Are they priced high and susceptible to a correction if market conditions change? Of course.

There may be a better way for investors

Instead of investing in this ETF and putting its success (or lack thereof) in the hands of a few companies, you should consider a similar but more diversified ETF such as Invesco QQQ Trust ETF (NASDAQ: QQQ). reflects Nasdaq-100an index containing the 100 largest non-financial companies traded on the Nasdaq stock exchange.

It’s not a pure technology ETF like the Vanguard ETF, but 50% of the ETF is made up of information technology companies, and its top three holdings are the same:

• Apple: 9.14%

• Microsoft: 8.32%

• Nvidia: 7.10%

This gives you the chance to reap the benefits of investing in some of the world’s best technology companies without relying too much on their success to drive the ETF’s performance.

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Stefon Walters has positions in Apple and Microsoft. The Motley Fool has positions and recommends Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 Microsoft calls and short $405 January 2026 Microsoft calls. The Motley Fool has a disclosure policy.

1 ETF I Wouldn’t Touch with a 10-Foot Pole was originally published by The Motley Fool