VOO vs QQQ: Which ETF Is Best?

Exchange-traded funds continue to dominate investors’ portfolios for good reason, they give buyers exposure to a wide range of assets and avoid stock-specific risk. 

Stock-based ETFs protect their holders from risks through diversification. For example, an investor who is bullish about the oil and gas industry might be hesitant to put all their funds into a single stock. Instead, they could buy a share of an ETF like the Energy Select Sector SPDR Fund (XLE), which has Exxon Mobil and Chevron among its top holdings.

Due to the artificial intelligence craze, no sector has been hotter than technology over the past few years. Investors have flocked to ETFs like Invesco’s QQQ ETF (NYSEARCA: QQQ) to gain exposure and QQQ they have been rewarded handsomely in recent years.

The heavy concentration of Magnificent 7 stocks might make some investors anxious, especially as AI stocks like NVIDIA and Microsoft have taken a step back in recent months. As a result, many investors have returned to a perennial favorite, Vanguard’s S&P 500 ETF (NYSEARCA: VOO), for a bit more diversification. 

So if you had to pick between them VOO or QQQ, which ranks best?

Is QQQ A Good ETF?

Though VOO might have the edge in recent months, QQQ has outperformed the S&P 500 by over 432% since its 1999 inception, according to Invesco.

The ETF tracks the Nasdaq-100 index, which includes the 100 largest non-financial companies listed on the exchange. Both the ETF and the index are rebalanced quarterly and reconstituted annually.

With 581.25 million shares outstanding, Invesco QQQ ETF has 101 holdings, $295 billion in assets under management (AUM). It also has a considerable 30-day average trading volume of 35.7 million.

Its low expense ratio of 0.20% is also quite attractive. It means that for every $1,000 invested, it will cost just $2 in annual expense costs to hold the position.

Geographically, most of Invesco QQQ ETF’s holdings are concentrated in the U.S., with notable big tech names like the “Magnificent 7,” which are majorly constituted in the fund’s top 10 holdings.

The fund’s top holding is Apple, which accounts for 8.86% of QQQ, followed by Microsoft with 8.29% of the ETF’s portfolio.

AI chipmakers Nvidia and Broadcom are next on the list, accounting for 7.34% and 5.33% of the ETF, respectively. Those stocks have overshadowed Amazon, Google, and Meta this year.

The AI buzz of the last few years has lifted QQQ 159.5% in the past five years, but it hasn’t all been smooth sailing.

Technology stocks slumped in 2022 as inflation and interest rates took their combined toll on the sector. The heavy tech focus meant that QQQ experienced a stronger drawdown than more diversified ETFs.

Apart from the “Magnificent 7” names, its top 10 holdings consist of only two other names: Broadcom Inc. (NASDAQ:AVGO), which has a 5.3% weighting, and Costco Wholesale Corporation (NASDAQ:COST), which has a 2.64% weighting.

Is VOO ETF A Good Investment?

Even though VOO’s holdings include the 500 stocks in the S&P 500, much of the ETF’s top stocks mirror QQQ’s.

Apple tops the list with 6.97% of VOO’s portfolio, followed by Microsoft with 6.54%. Nvidia is in third position, but Broadcom is relegated to tenth place in VOO’s holdings.

In addition to tech names like Meta and Google, financial services company Berkshire Hathaway and healthcare giant Eli Lilly are included in VOO’s top 10. Despite those additions, tech stocks still account for over 31% of the ETF’s portfolio.

Vanguard launched VOO in 2010, and it has skyrocketed in popularity ever since. Though the ETF was built to track the 500 largest U.S. companies, much like QQQ the stocks aren’t equally weighted, so about a third of VOO’s portfolio is in its top 10 stocks.

This large blend ETF operates as a play on mega and large-cap stocks and, with a risk profile of moderate to aggressive, is well-suited for investors who have an investment horizon of 10 years or more.

The fund’s expense ratio is 0.03%, which is highly attractive. To put this into perspective, the average expense ratio of similar funds is 0.79%. So, for every $10,000 invested in VOO, Vanguard charges holders just $3 whereas the average expense ratio of rival funds is $79 annually. 

The underlying index has a beta of 1.00, meaning it tracks the market precisely. Or in other words, it won’t show more or less volatility than the market because it is a representation of the market.

Unlike the Invesco QQQ ETF, the Vanguard S&P 500 ETF does not have a majority of its assets in the technology sector. However, a significant portion (29.8%) is dedicated to the information technology sector. This is followed by financials (13%), healthcare (12.5%), and consumer discretionary (10.6%) sectors.

Which ETF Is More Undervalued: VOO or QQQ?

There may be similarities in the two ETFs top holdings, but the increased number of stocks in the S&P 500 means VOO has a smaller stake in each one of its holdings. That diversification is one of the fund’s main strengths.

VOO is a bit more expensive than QQQ, coming in at roughly $527 per share compared to the tech ETF’s $485.

As the valuations of so many tech companies have soared this year, QQQ’s price-to-earnings multiple has reached a lofty 38.8x.

VOO’s P/E is currently 27.2x, which may indicate that VOO is comparatively undervalued. That is substantiated by the fact that QQQ has a price-to-book ratio of 16.6x.

One of the most important components of ETFs is their dividend. QQQ currently has an annual dividend yield of 0.56%, while VOO has a 1.36% yield.

The ETFs’ dividend payout fluctuates each quarter, but the last quarterly payout for VOO was $1.78 per share, compared to QQQ’s recent quarterly dividend of $0.67 per share.

What Are The Expense Ratios For VOO And QQQ?

Though both funds are passively managed, Vanguard and Invesco charge fees to ETF investors. However, the funds’ fees aren’t directly charged, they are simply removed from the investments’ value over time.

VOO has an expense ratio of 0.03%, which means a $10,000 investment in the ETF that is held for one year would cost an investor $3. According to Vanguard, the average ETF expense ratio for similar funds is 0.78%.

QQQ has a 0.20% expense ratio so for every $10,000 invested, $20 goes to fees.

VOO vs QQQ: Which ETF Is Best?

VOO has a much lower expense ratio of just 0.03% versus 0.20% for QQQ but the latter has a much higher 10-year track record of 18.1% vs 13.1% annualized.

For conservative-minded investors, VOO’s lower expense ratio and higher dividend yield is more appealing but risk-seeking investors may prefer QQQ in spite of its higher volatility.

Judging by returns alone, QQQ has been the far better investment over the years, despite paying out lower dividends and higher fees. However, just because the tech industry has been on a tear doesn’t mean those gains will continue. There has already been AI fatigue and rising concerns about a tech stock bubble.

One of the main reasons investors have returned to S&P 500 funds is they offer the best returns with optimal diversification. The mega-cap stocks in VOO are generally stable and profitable and more likely to pay dividends than the tech giants, which is why VOO has a higher dividend yield.

Both ETFs carry risk due to their high tech concentrations. If there is a significant step back for tech stocks, both ETFs will endure repercussions. QQQ will experience more volatility in that scenario, but it is also set up to reap greater rewards when times are good for tech stocks.

Both VOO and QQQ are solid investments, and there is room for both ETFs in many portfolios. Determining how to weight each investment will depend on an investor’s risk tolerance, desire for dividends, and forecast for the future of the tech industry.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.