Forget Index Funds: Here's the One Sector I'd Buy First as a New Investor

You can start investing by opening a brokerage account. It's easy to buy stocks and funds using one of these accounts. While index funds are touted as good for beginners, I prefer allocating capital to the tech sector instead.

Tech ETFs like the Vanguard Information Technology ETF (NYSEMKT: VGT) have reliably outperformed the S&P 500 for many years, and that trend is likely to continue. Here's why I like investing in tech over broad-market index funds.

The S&P 500 has a lot of dead weight

Tucked away in the S&P 500's annualized 15.3% return over the past decade are a bunch of unproductive companies that are dragging down the fund's total returns. A tech exchange-traded fund (ETF) gets rid of most of the dead weight and focuses on the S&P 500's top contributors.

Nine of the 10 best-performing S&P 500 stocks are directly tied to the artificial intelligence build-out. Of those nine stocks, only one of them -- Bloom Energy (NYSE: BE) -- isn't a tech company. The majority of S&P 500 stocks fail to beat the benchmark, and almost half of the index's companies have posted a negative year-to-date return.

Most of the companies with negative returns in the S&P 500 are not tech companies. However, Salesforce (NYSE: CRM), Oracle (NYSE: ORCL), and AppLovin (NASDAQ: APP) are notable exceptions, with the latter being one of the biggest losers in the entire S&P 500 this year.

The fact that the S&P 500 has underperforming companies proves that doing some extra research can unlock meaningful returns. Researching within the S&P 500 reveals a common theme: tech companies leading the way.

The index is practically on the path to becoming a tech fund anyway. Since the S&P 500 uses market caps to weight positions, big gains in AI stocks mean they will represent a larger share of the S&P 500 going forward. Their influence on the index will also grow as laggards continue to remain flat or lose ground.

Follow the money

If you want to find a stock that could double in the next five years, you should look for a company that could at least double its revenue over that same stretch. Some companies manage to double their revenue year over year, and that's a common theme among top-performing S&P 500 stocks.

Although Walmart (NASDAQ: WMT), Procter & Gamble (NYSE: PG), and Home Depot (NYSE: HD) are household names, they haven't performed well this year. Single-digit revenue growth rates and flat or negative year-to-date stock returns have defined these companies.

Nvidia (NASDAQ: NVDA) is also a household name that's outperforming the S&P 500, with revenue still poised to double. Its sales were up 106% year over year in its fiscal 2027 second quarter, and that's an achievement that Walmart, Procter & Gamble, and Home Depot will never match moving forward.

The tech sector offers the possibility of stocks that can double revenue year over year and expand profit margins. That type of investment is much harder to find in other sectors. Funds like the Vanguard Information Technology ETF make it easier to invest in tech as a theme, rather than hunting for individual growth stocks for those just getting started.

Investing in tech stocks can help you learn about opportunities

The AI trade has gripped many investors, and investing in AI stocks is one way to understand it. Nvidia was the first pick that centered exclusively around artificial intelligence. Investors realized its AI chips were foundational for AI models, physical AI, and other innovations. That made Nvidia the world's most valuable publicly traded company.

Since then, investors have shifted their attention to smaller components. Each Nvidia chip also has a bunch of memory chips, and that turned Micron (NASDAQ: MU) into a trillion-dollar company. Those same chips must be liquid-cooled so they do not overheat in data centers, which helped Vertiv (NYSE: VRT) outperform the broader market.

Investing in Procter & Gamble and Home Depot won't teach you much about upcoming tech innovations that could fuel the next multi-baggers. Getting tech exposure early in your investing career puts you at the center of the most consistently lucrative opportunity in the stock market. That's why I prefer investing in the tech sector over a broad index fund.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bloom Energy, Home Depot, Micron Technology, Nvidia, Oracle, Salesforce, Vertiv, and Walmart. The Motley Fool has a disclosure policy.