Exchange-traded funds (ETFs) are an easy way to diversify your investments in a market segment or group of stocks instead of depending on one company.
This investment tool allows you to benefit from high-priced stocks that may otherwise be out of your price range. It also helps you mitigate risk by participating in an advanced trading strategy that may otherwise be inaccessible, either through lack of finances or information.
Two popular ETFs are Vanguard Information Technology (NYSEARCA:VGT) and PowerShares QQQ although you may not know the differences in what they actually do. This is your guide to comparing QQQ vs VGT and determining which one you should invest in.
Let’s start by explaining what each fund comprises, starting with QQQ.
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There are several ways to invest in QQQ, which can be a bit confusing to the average investor.
This includes the QQQ stock symbol, ProShares TR/Ultrashort QQQ ETF (NYSEARCA:QID), ProShares TR/UltraPro Short QQQ (NASDAQ:SQQQ), ProShares TR/UltraPro QQQ (NASDAQ:TQQQ), and to a lesser extent Invesco Ltd. (NYSE:IVZ), the investment management company running the fund.
These are ways to bet on or against the Nasdaq 100 index, a group of 100 actively traded non-financial stocks. In some cases you gain exposure
QQQ comprises companies across sectors like technology, healthcare, retail, and more.
Each company is weighted to keep members with different market capitalizations balanced. To qualify, a company needs to be listed on the Nasdaq exchange for at least two years with an average daily trading volume over 200,000, along with releasing quarterly and annual reports.
Companies are disqualified for issues such as filing bankruptcy and must be listed exclusively on Nasdaq.
Notable companies in the Nasdaq 100 include
- Apple Inc. (NASDAQ:AAPL)
- Amazon.com, Inc. (NASDAQ:AMZN)
- NVIDIA Corporation (NASDAQ:NVDA)
- Facebook, Inc. Common Stock (NASDAQ:FB)
- Tesla Inc (NASDAQ:TSLA)
- PayPal, Holdings Inc (NASDAQ:PYPL)
- Comcast Corporation (NASDAQ: CMCSA)
Technology companies account for a large portion of the QQQ index, at over 60 percent of the fund. The QQQ ETF has over $125 billion in assets under management, and it’s a cost-efficient exposure to a broad range of companies.
The QID fund goes a step further, doubling your exposure via a series of futures and swaps. If the QQQ falls, QID corresponds to 2x the inverse movement – so you can make money as the broader market declines.
SQQQ and TQQ kick it up another notch by seeking triple daily returns through two separate and riskier strategies.
At the root of each ETF, however, is the Nasdaq 100. The long-term oriented investor is best served buying QQQ as it exposes them to long-term stock market gains in the technology sector while traders who aim to profit from shorter term dips in price can look to the QID or SQQQ.
Vanguard Information Technology ETF Explained
While they have a lot of the same investments – like Microsoft Corporation (NASDAQ:MSFT), PayPal, Nvidia – the Vanguard Information Technology ETF dives deeper into technology stocks than QQQ.
It’s a technology-specific ETF that seeks to replicate the broader technology sector. However, there are some notable tech stocks missing.
Besides those already mentioned, it also includes several heavy-hitting financial technology stocks, like:
- Visa Inc. Class A (NYSE:V)
- Mastercard Incorporated Class A (NYSE:MA)
- Cisco Systems Inc. (NASDAQ:CSCO)
- Intel Corporation (NASDAQ:INTC)
- Adobe Inc (NASDAQ:ADBE)
- Oracle Corporation (NYSE:ORCL)
- Salesforce.com, inc. (NYSE:CRM)
Like QQQ, its biggest exposure is in Apple, but this ETF portfolio’s Top 10 list notably lacks Facebook, Inc. (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOGL), and Amazon (AMZN).
If you want to include those while sticking with Vanguard, the Vanguard Growth ETF (NYSEMKT:VUG) is the perfect fund for that, although it also includes non-tech securities.
The VGT is one of many ETFs provided by Vanguard – in fact, it’s the second largest provider after iShares. It has a wide variety of industry-specific ETFs, and each is a broader part of the Vanguard Total Stock Market ETF (NYSEARCA:VTI).
VGT is passively managed to track and manage the performance benchmarks of the information technology market sector. Each component is weighted to balance the market capitalizations and ensure a smooth investment vehicle.
In fact, let’s dive deeper into the investment differences between the Nasdaq 100 and Vanguard’s indexes to see how they compare.
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What Stocks Make Up QQQ?
There are 100 stocks in the Nasdaq 100, and they run the gamut of industries. Its heyday came during the Dotcom Bubble at the turn of the millennium, although it still maintains around $10 billion in average daily trading volume in 2020.
Stocks on the QQQ index include:
- Activision Blizzard Inc (NASDAQ:ATVI)
- Charter Communications Inc (NASDAQ:CHTR)
- Dollar Tree, Inc. (NASDAQ:DLTR)
- Kraft Heinz Co (NASDAQ:KHC)
- Mondelez International Inc (NASDAQ:MDLZ)
- NXP Semiconductors (NASDAQ:NXPI)
- Sirius XM Holdings Inc (NASDAQ:SIRI)
- T-Mobile US (NASDAQ:TMUS)
- Ulta Beauty Inc (NASDAQ:ULTA)
- Verisign, Inc. (NASDAQ:VRSN)
Zoom Video Communications Inc (NASDAQ:ZM), DexCom, Inc. (NASDAQ:DXCM), DocuSign Inc (NASDAQ:DOCU), Moderna Inc (NASDAQ:MRNA), and Pinduoduo Inc – ADR (NASDAQ:PDD) were all added to the index in the aftermath of the 2020 novel coronavirus pandemic.
They were able to successfully recover and generate revenues to maintain or gain value for investors while the components they replaced (which included multiple airlines) failed.
In fact, every year, the Nasdaq 100 is rebalanced and reranked, while included companies can be replaced at any time by higher-performing investments.
This fluidity ensures you benefit from an advanced investment strategy without needing to actively monitor the entire market to determine where your funds should go.
Typically, only day traders and large investment firms have professional analysts watching these markets. With the QQQ ETF, you gain their experience without the time investment.
Let’s explore the fees involved with investing in each of these ETFs mentioned.
QQQ Fees and Expense Ratios
The expense ratio or managed expense ratio (ER/MER) is how much of the ETF’s assets are used for operational expenses.
Because these administrative and other costs are deducted from the fund itself, it reduces the assets and subsequent return to investors. For the QQQ ETF, the expense ratio is 0.2 percent.
QID, on the other hand, requires a lot more hands-on approach, and its expense ratio increases to 0.95 percent.
TQQQ and SQQQ also have a 0.95 percent expense ratio, making each of them extraordinarily high.
By comparison, the S&P 500 has over a dozen index funds with an expense ratio of less than 0.1 percent.
QQQ, which is the lowest ratio of the indices is still twice as expensive to manage as any of the S&P 500 funds.
VGT Costs and Management Fees
VGT has an expense ratio of 0.1 percent. This is more expensive than both the S&P 500, although still cheaper than QQQ and far less than the other Invesco ETF offerings.
Vanguard also offers an optional Personal Advisor Services asset management fee of 0.3 percent that covers all the administration costs of additional personal advisory services.
|VANGUARD PERSONAL ADVISOR SERVICES|
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Because the company has over $6.2 trillion in assets under management, there is a good chance you may already have something invested in Vanguard without even knowing it.
If you do use them as your investment firm, be aware that they will favor their own ETFs over competitors.
Now that you understand the fee structures of each ETF, let’s discuss what really matters – how much money they’re returning to investors.
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QQQ Returns vs VGT Returns
Each of these funds is popular because they have healthy financial returns for investors, in the form of both market growth and dividend payments.
While no investment’s future is guaranteed, here’s what these two ETFs have historically paid heading into the 2020s.
QQQ has an annual dividend yield of 0.55%, or approximately $1.629 per share annually.
Its five-year growth from 2015-2020 nearly tripled its value, growing from just over $100 to over $275 per share.
It also more than doubled in price during the previous five-year period from $45 in 2010. This gives it strong performance indicators moving through the 2020s.
VGT also pays a cash dividend, although the coronavirus may have suspended this for the remainder of 2020.
In 2019, the fund paid $2.72 per share to investors, and $1.516 was already distributed in 2020 before the end-year freeze.
In the five-year period from 2015-2020, VGT tripled in price, going from $100 in 2015 to over $300 in 2020.
Its previous five-year performance was a little slower though, increasing from $60 to $100 per share.
QQQ vs VGT: The Bottom Line
ETFs are a great way to diversify your investment portfolio without needing to spend a lot of money to get 1 share of an expensive company.
They also provide the benefit of advanced trading strategies that are passively executed, so you don’t have to watch the market. QQQ and VGT are both popular choices for those seeking a technology investment.
VGT is outperforming QQQ in 2020, and it has a more tech-focused offering. It’s also slightly cheaper with fees, making it the obvious choice between the two, unless you really want a piece of companies like Facebook, Google, and Amazon.