Forget the Dow Jones -- Buy This Magnificent ETF Instead

If you have a passing interest in stock markets and indexes, you may be familiar with the Dow Jones Industrial Average. It's often viewed as a proxy for the entire U.S. stock market, but it really shouldn't be.

You might also know that it's smart to invest in index funds, and that's very true. But don't go looking for an index fund that tracks the Dow Jones. Instead, here's an index fund with a stronger track record and a more promising future.

Image source: Getty Images.

What's wrong with the Dow Jones Industrial Average?

Here's what might surprise you most about "the Dow": It includes only 30 stocks. The stock index debuted way back in 1896 when it encompassed only 12 stocks. But today its holdings range from Amazon.com and American Express to Walmart and Walt Disney. It aims to represent the U.S. economy, but with only 30 holdings, many major businesses are excluded, such as Google parent Alphabet, Warren Buffett's Berkshire Hathaway, and Bank of America.

Another issue with the Dow is that it's price-weighted; its value is an average of all its components' stock prices. (It's a bit more complicated than that, involving a "divisor.") The S&P 500 index, a much more representative index of the U.S. economy, is "market-weighted," meaning that its components are weighted by their market value, so the biggest companies in the index, such as Microsoft, Apple, and Nvidia, carry the most influence.

With the Dow, it's the stocks with the highest stock prices that are most influential, so UnitedHealth Group, with a recent stock price near $500, will influence the index about 10 times more than Cisco Systems, with its recent price near $46 per share, even though UnitedHealth is only about two-and-a-half times as big as Cisco.

The Dow Jones as an investment

You can invest in the Dow if you want, and a key way to do so is via the SPDR Dow Jones Industrial Average ETF (DIA). Its performance hasn't been too shabby over the long term, averaging annual gains of 11.05% over the past decade and 12.92% over the past 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.

Meet the Vanguard Information Technology ETF

The Vanguard Information Technology ETF (VGT -0.17%) has a lot to offer investors looking for solid growth over the long term. (Remember that over the short term, the overall stock market is unpredictable and could rise or fall sharply in any year, taking index funds that track it up or down sharply, too.)

For starters, the Vanguard Information Technology ETF sports a low "expense ratio," or annual fee, of just 0.10%. So if you put $1,000 in it, you'll pay about $1 per year in fees. Check out its past performance and how it compares to that of the Dow ETF and a major S&P 500 ETF as well:

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

Impressive, right? Remember that the overall stock market has averaged annual gains of close to 10% over long periods. The returns above even trounce 15% returns. Of course, you can't count on its past performance repeating -- it all depends on how its components perform. So what are its components? I'm 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 investment return of stocks in the information technology sector." And it "includes stocks of companies that serve the electronics and computer industries or that manufacture products based on the latest applied science."

It recently encompassed 313 stocks, and these were the top 10 as of the end of April:

Source: Vanguard.

You can see that there's a wide variety of tech-focused companies, with behemoths wielding a lot of influence. That's not necessarily a bad thing (and some other tech-heavy ETFs have the same companies carrying even more weight). After all, these huge companies have gotten huge by performing well and simply growing, 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 bullish on the growth potential of the kinds of companies in which it's invested. 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 hope for higher returns than those funds would deliver.