VGT vs PSI: What’s the Better Buy?

Investing in tech ETFs can be a fantastic way to buy into this profitable sector of the market without having to invest in individual stocks, diversifying your portfolio and amplifying your earnings at the same time.

The Vanguard Information Technology ETF (NYSEMKT: VGT) and the Invesco Semiconductors ETF (NYSEMKT: PSI) are both tech-focused funds with ties to the artificial intelligence (AI) industry, but which one is the better buy? Here’s what you need to know.

Both of these ETFs are strong performers in their own right, but the deciding differentiator for many investors will be their diversification.

The Vanguard Information Technology ETF contains 322 tech stocks, and while its top sector allocation is semiconductors, it also includes stocks from nearly a dozen other subsectors as well — from software and hardware to infrastructure to manufacturing services.

That level of diversification can help limit risk, especially during periods of market volatility. However, it also increases the chances that lower-performing stocks will dilute the fund’s overall returns.

The Invesco Semiconductor ETF, on the other hand, is less diversified but offers greater earning potential. It contains only 30 holdings, all of which are semiconductor stocks. That narrow focus increases its risk substantially, but sometimes, a more targeted approach can lead to higher total returns.

Over the last 10 years, for example, the Vanguard Information Technology ETF has earned an average rate of return of 22.18% per year, compared to the Invesco Semiconductor ETF’s 24.98% average annual return in that time.

Both ETFs can be powerful investments, but the right one for you will depend on your risk tolerance, goals, and gaps you’re looking to fill within your portfolio.

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Katie Brockman has positions in Vanguard Information Technology ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

VGT vs PSI: What’s the Better Buy? was originally published by The Motley Fool