Is It Better to Buy QQQ or VOO?

While the Federal Reserve continues to to keep rates steady while hinting at rate cuts, the broader market continues to march higher.

Regardless of the trend, however, certain ETFs are better than others. Two that rank well consistently are the Invesco QQQ (QQQ) and Vanguard S&P 500 (VOO) exchange traded funds, but which is best? 

The last Fed policy meeting held interest rates steady at the 5.25%-5.5% range, the highest level in over 23 years.

Although the initial shock has faded, the market has been on edge for some time due to concerns that elevated interest rates would impact the broader economy. Despite three rate cuts projected this year, strong economic growth figures might suggest otherwise.

Amid the uncertainty and volatility, ETFs offer the diversification needed, particularly for conservative investors, to better ride through economic storms versus single stock exposure.

We look into two prominent ETFs, Invesco QQQ Trust (NASDAQ:QQQ) and Vanguard S&P 500 ETF (NYSEARCA:VOO), to determine the better pick.

Both funds have produced significant returns for inception since their inception. As of December 31, 2023, an investment of $10,000 in the funds 10 years ago in QQQ and VOO would have been worth $50,847 and $30,725, respectively, by now.

Big-Tech Heavy Invesco QQQ Trust (QQQ)

Tracking the tech-heavy Nasdaq-100® Index, Invesco QQQ ETF provides exposure to the 100 largest domestic and international non-financial companies listed on the Nasdaq stock market. The fund has been operating since 1999. The trust is not actively managed and is rebalanced quarterly and reconstituted annually.

With 581.25 million shares outstanding, Invesco QQQ ETF has 101 holdings, $257.99 billion in assets under management (AUM), and a net asset value (NAV) of $443.85. It also has a considerable 30-day average trading volume of 47.15 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.

Like the underlying index, the fund’s holdings are heavily inclined toward the technology sector. As of year-end 2023, Invesco QQQ ETF has 57.64% of its total investments in the tech sector. The next largest holding component was the consumer discretionary sector (19%).

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 largest holding is Microsoft Corporation (NASDAQ:MSFT), with an 8.84% fund weighting, followed by Apple Inc. (NASDAQ:AAPL), that has a 7.72% weighting.

Apart from the “Magnificent 7” names, its top 10 holdings consist of only two other names: Broadcom Inc. (NASDAQ:AVGO), which has a 4.27% weighting, and Costco Wholesale Corporation (NASDAQ:COST), which has a 2.38% weighting.

In the fiscal year ended September 2023, Invesco QQQ ETF’s total investment income increased 6% year-over-year to approximately $1.53 billion, while its net investment income surged about 9% from the prior year to $1.18 billion. Its portfolio turnover rate jumped from 7.10% in fiscal 2022 to 22.08% in fiscal 2023.

The fund pays quarterly dividends on the last business day of April, July, October and December and the annual dividend yields 0.55% on prevailing prices. The trust’s annual total returns stood at 54.73% for 2023 compared to negative 32.51% in the prior year.

Blue-Chip Loaded Vanguard S&P 500 ETF (VOO)

Since its inception in 2010, the Vanguard S&P 500 ETF invests in stocks comprising the 500 largest U.S. companies in the Standard & Poor index.

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.

As of last month, the fund had approximately $1.10 trillion in total net assets, with 505 stocks in its portfolio. As of March 20, its NAV stood at $479.84. The average annual earnings growth rate over the past five years for the stocks in Vanguard S&P 500 ETF’s portfolio is 15.7%.

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.

Except for Tesla, Inc. (NASDAQ:TSLA), all “Magnificent 7” stocks are among the trust’s top 10 holdings. Microsoft is the largest holding, with a 7.16% weighting, followed by Apple with a 6.16% weighting.

Other notable names in its top holdings are Berkshire Hathaway Inc. (NYSE:BRK.B), which has a 1.74% weighting; Eli Lilly and Company (NYSE:LLY), which has a 1.40% weighting; and Broadcom, which has a 1.33% weighting.

The fund ended 2023 with $13.90 billion in net investment income and $20.80 billion in realized net gains. It returned 30.41% over the past year and 7.1% year to date. In Q1 it paid a $1.5429 per share quarterly dividend while its annual dividend of $6.36 yields 1.33% on prevailing prices.

QQQ vs VOO, Which 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 508% vs 307%.

While investing in a fund loaded with big names does not equate to skyrocketing returns compared to some faster-growing smaller companies, they provide inherent stability to a portfolio by virtue of their profitable businesses. Hence, these two ETFs might be solid buys now, with volatility still reigning.

That being said, over the past year, both ETFs have provided investors with robust returns in terms of the market price. Invesco QQQ ETF has gained 45% over this period, while Vanguard S&P 500 ETF returned 32.1%.

QQQ’s outperformance can be attributed to the tech sector’s impressive recovery thanks to investor enthusiasm over the prospects and applications of artificial intelligence.

Moreover, the Nasdaq 100 index has generated faster 10-year growth than major industry benchmarks, including the S&P 500. 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.

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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.