We’ve done a number of comparisons on Invesco’s QQQ with other funds. This time we’re looking at QQQ vs Vanguard’s VOO. Both are popular ETFs and it’s worth examining where these two are similar and where they’re different. Which one would be best for your portfolio? Let’s dive in!
QQQ vs VOO: A quick summary
There are meaningful differences between the two funds. Here’s a quick summary of the two funds with greater detail further below in the article.
- QQQ tracks the Nasdaq-100 index which mainly contains technology firms (~75% by weight) along with some non-tech companies such as Pepsi, Costco, Dollar Tree, etc.
- VOO tracks the S&P 500 index, the most popular benchmark for a broad basket of US stocks.
- QQQ has outperformed VOO over multi-year periods (going back 10 years), but suffered much more in the most recent 1-year period where technology stocks have been hit quite severely.
- The VOO is more diversified than QQQ, but the Tech sector is naturally the most prominent exposure in both the funds.
- The dividend yield of both funds is low: QQQ is 0.77% vs VOO’s 1.6%.
- I do not have any concerns about their fees, market liquidity, or fund size.
Mandate and Underlying Index
The Invesco QQQ is an exchange-traded fund that tracks the Nasdaq-100 Index. The index has approximately 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market, which means the exposure is primarily to technology companies. The index is market capitalization weighted.
Vanguard’s S&P 500 ETF (VOO) tracks the Standard & Poor’s 500 stock index, which is the gold standard for tracking a broad bucket of the largest and most successful and profitable companies in the US. The index consists of 500 largest companies in the US and is weighted by market capitalization. The goal of this fund is to track the overall returns of US companies.
Naturally as one would expect, there will be a big difference between the two benchmarks. The S&P 500 is a broad market index whereas the Nasdaq-100 has a greater emphasis on technology. Additionally, as S&P is an index provider and not an exchange operator, their benchmark has stocks listed on both the NYSE and Nasdaq exchanges. Whereas the Nasdaq-100, by necessity of being a self-serving benchmark, only includes stocks that are listed on the Nasdaq exchange. This means that you lose out on technology stocks listed on the NYSE, which is a big short coming of this ETF.
Holdings
Let’s dissect the holdings in a couple of different manners. This will help us get the best idea of what’s going on under the hood.
Sector Allocation
I had a preconception that as QQQ has the name “Nasdaq” attached to it, it is a tech-only ETF. Surprisingly, this is not accurate! Let’s look at the holdings first classified by sector to understand this further:
As you can see, the QQQ does have a substantial allocation to the IT sector – just over 50% of the fund is allocate to that alone. Once you include some other companies that we typically would consider to be tech but that are classified under other sectors, such as Alphabet/Google or Meta/Facebook (Communication Services) and Amazon or Tesla (Consumer Discretionary), the actual tech-oriented weight does increase.
Based on my assessment, around 75% of the fund is invested in technology-related companies. However QQQ misses out on many important companies like Salesforce, Oracle, ServiceNow, AMD, Mastercard, Visa, etc.
The balance 25% is invested in a variety of non-tech companies such as Pepsi, Costco, Dollar Tree, etc. Even utilities like American Electric Power Co and Exelon make the cut. This part was surprising for me, mostly due to my pre-conceived notions about what the Nasdaq actually is.
As is clear from the table above, the VOO is a well diversified fund and is spread across multiple sectors with good representation from each. Of course being market capitalization weighted means that the benchmark still skews towards the large technology names, but with some degree of balance.
The upshot of being less tech-focused is that the fund is not tied to the fortunes of just one sector. Diversification also brings in a little bit lower volatility in the performance. One way to measure volatility is to check the Beta of the two funds against a representative index. In this case, the 1-year Beta of QQQ against the MSCI USA Large Cap growth index is 1.28 whereas that of the VOO is 0.98, which is a meaningful difference. This means that VOO has lower volatility in comparison to QQQ.
It’s important to remember that market volatility is not the same thing as investment risk. Sure the two might feel similar, but in reality, risk is how likely you are to lose your money permanently.
Aside from QQQ’s concentration in the technology sector, you are not taking any dramatic or extraordinary risk by investing in either of these ETFs.
Top 10 Holdings
Let’s look at the top-10 holdings in each of the funds.
A few observations:
- Both funds have a great deal of similarity in the top-10 names, but there is a big difference in the weight allocated to those names.
- QQQ’s greater concentration is obvious by the fact that its top-10 holdings account for around 49% of the weight whereas in the VOO it’s only 26%.
- Even in the top-5 holdings, QQQ is significantly more concentrated. QQQ’s weight in top-5 holdings is equal to approximately 36% (more than VOO’s weight in the top 10), compared to VOO’s 19%.
- The differences in top-10 holdings are that QQQ has Pepsi, Costco, and Meta, whereas VOO brings in Berkshire Hathaway, UnitedHealth, Exxon Mobil, and J&J.
Geographic Allocation
The geographic allocation for QQQ is somewhat bizarre to me. As the table below shows it has 98% of the weight allocated to US companies, but with a few stubs in other countries. The holdings in China consist of the Nasdaq-listed ADRs of companies like Pinduoduo, JD, and Baidu. However, companies like Alibaba and Tencent are missing as they’re not listed on the Nasdaq.
Note that the China weight has declined recently because the Chinese market has heavily underperformed the US market. It used to be nearly double this amount up until recently.
In the case of the VOO, the funds are exclusively invested in US-based companies. Note however that this does not mean these companies only generate their revenue in the US. Many of the companies in the S&P 500 are US-based multinationals and generate their earnings (and also have their operations) across the world.
In the S&P 500, and by extension in VOO, 61% of the revenues are generated domestically in the US. The balance comes from other countries such as China (7%), Japan (2.8%), UK (2.4%), and others.
In the QQQ, the revenue sources are more diversified given its slightly more global nature and tech focus: only 52% of revenues are sourced from the US, whereas 12% of revenues come from China, followed by Japan (3.5%), Germany (2.6%), and the UK (2.4%).
Market Capitalization
As expected, both funds are allocated to the large cap names. QQQ’s allocation to large cap names (> $13B in market capitalization) is 99.6%. The VOO is not that far behind at 97% of the fund invested in large cap names. If the market had not been in a correction phase (as of writing), I expect this would have been 100%.
Performance
Given how well the technology industry continues to perform, it’s no surprise that the QQQ has outperformed the VOO over multiple years. Surprisingly enough, QQQ has even outperformed VOO over the long term despite underperforming in the most recent 1-year period.
Let’s take a look at the price charts for the 5-year and 1-year periods. It becomes obvious here that the difference of roughly 3 percentage points between the two funds’ performance over the 5 year period is actually meaningful on a compounded basis!
On a 1-year basis, both funds have declined, but the QQQ has been hammered significantly more.
The higher volatility of the QQQ compared to the VOO is clearly apparent in the above charts. Despite the worse performance in 2022, QQQ still holds a compelling lead over the VOO.
Long-term Returns for QQQ vs VOO
Given the bad rap that tech stocks tend to get, I wanted to see how VOO does compared to the QQQ over the long long long run. I went back to 1999 to run the comparison for total returns. It’s very important to measure total returns over the long term as dividend reinvestment over such a long period of time will make a big difference in returns. A simple price chart from Yahoo Finance will therefore be incorrect over such a long period.
The VOO was not launched that far back, so I used SPDR’s equivalent, the SPY, as a proxy. Both track the same underlying index, so it works for our purpose.
Let’s look at two charts and hopefully the point I want to make will become clear. The first chart shows the comparison from Jan 1 1999 to November 2022. The second chart shows the same two funds, but from Jan 1, 2000 to November 2022.
I picked 1999 as that was right before the tech bubble of ’99/’00 really inflated and gathered steam. In this first case, you can see that QQQ outperforms nicely over that entire period, delivering total cumulative returns of 634% compared to 484% for the SPY/VOO.
Here you can see that if you had bought the QQQ close to the peak at the start of 2000, your returns would be dramatically different. The QQQ outperforms over the period having delivered 416% total cumulative returns compared to 364% for the SPY.
Note however what happened from 2000 to 2020. For 20 years, the S&P 500 (so SPY and VOO) outperformed the QQQ. So although in hindsight it might look like the better decision is to own the QQQ regardless of any situation, the reality is that you would have been underperforming for 20 years with the QQQ! And the only reason why QQQ outperformed over that entire period is because we had another tech bubble that started in 2020.
The important takeaway point here is that valuation matters. Take a look at the next situation – if you were smart and lucky enough to buy the QQQ at close to the bottom of the market correction in 2003, you would have outperformed the VOO (using SPY as proxy) dramatically.
Even excluding the latest tech bubble of 2020, from Jan 1 2003 to Dec 31 2019, the QQQ delivered 991% cumulative total returns compared to 523% for the SPY/QQQ. If I extend the end date to November 2022, then you would have generated a monster 1360% in total cumulative returns in the QQQ compared to 683% in the VOO (using SPY as proxy).
I stress again: valuation is the ultimate driver of returns. Timing the market is difficult as timing only becomes apparent in hindsight. Valuation however can be known so it’s important to look at metrics like price-to-earnings or price-to-book. Also being a contrarian can help too – buying tech stocks when everyone is buying it is most likely a recipe for underperformance!
Dividend Yield
Neither of the funds is a large dividend payer. VOO has a 1.6% dividend yield (30-day SEC) as compared to 0.77% of QQQ (30-day SEC). Neither of these numbers is meaningful enough to have an impact on your decision-making. The funds are expected to generate their returns primarily through an increase in asset price rather than dividends.
However as discussed, dividend reinvestment does make a difference over the long run, so you should always use expected total returns to drive your decision making. Prioritizing just dividends, or ignoring reinvstement, could lead to a lower total return – which could be a very costly mistake for your portfolio.
For a graphic example of how much impact this can have, take a look at my comparison of the SPY vs SPYD. The SPY is SPDR’s ETF to track the S&P 500 ETF, which means the comparison is directly relevant for the VOO here.
Expense Ratios
VOO has an expense ratio of 0.03% while QQQ charges 0.2%. Both numbers are excellent and shouldn’t be used to discriminate between the funds. The average expense ratio is 0.1% in Vanguard funds, which is already better than the industry average.
The difference is negligible: On each $1,000 invested in the funds, you are looking at a difference in fees of $1.7. As you may appreciate this is irrelevant and can be safely ignored.
Once you are below a differential of 0.25% in fees, the fee will cease to be a driver or differentiating factor for your returns. At that point how and when you buy and sell the funds will be a bigger driver of returns.
Fund Size & Liquidity
While both funds are quite large and liquid, there’s a notable difference between the two on these factors:
- Size: QQQ has $148 billion in AUM compared to $266 billion for the VOO (but $748 billion for the fund total net assets).
- Trading liquidity: Both funds are very liquid: QQQ trades an average of 56.7 million shares daily compared to the VOO’s 4.6 million.
Unless you’re a BIG fish with millions of dollars to invest in either of these ETFs, it’s unlikely that you will move the market. Neither fund size or trading liquidity is therefore a material factor for us.
Looking Ahead
In investing, the future matters much more than the past. We’ve had a big market correction in 2022, so now it’s important to understand what can happen in the future.
Given the big difference between the two funds’ exposure, it is natural that there will continue to remain a performance gap between the two. As technology firms typically have higher growth rates and higher profitability compared to companies in the broader economy, it is natural that tech stocks will continue to do well over the longer term.
In the shorter-term though, it is possible and likely that tech stocks will continue to underperform the broader market as investors remain concerned about the economy, interest rates, and geopolitical stability. As tech stocks typically trade at high valuation multiples, they are more prone to fall in such scenarios. It is possible also that in the coming year, stocks in other sectors may deliver somewhat better returns.
Having said that, as tech stocks are out of favour now, your best opportunity to buy tech stocks is likely now as that will deliver the best performance over the longer term. As long-term investors, your decisions should be driven by what delivers the best returns in the long-term, rather than worrying about short-term performance.
It is also important to remember that diversifying your portfolio is crucial to reducing volatility. Depending on your personal risk tolerance and other relevant factors, it is important to ensure that you have a proper asset allocation. In many cases, shooting for the best all-out performance may not be the right plan as it may come at the cost of increased volatility.
Figure out a plan that works best for you, then buy the stocks, ETFs, and funds that work best to deliver on your plan.
Which ETF is better QQQ or VOO?
Based on the very long term returns we discussed earlier in this article, it is clear that the answer will vary based on which phase of the market we are in. As of writing this article (December 2022), I believe that the QQQ may have a slight edge currently. However both funds are cheap relative to recent historical valuations and I think it makes sense to buy both for good long term returns.
If you are looking to the QQQ simply for tech exposure, then honestly it is not my favourite tech-focused ETF. There are better options which I think are worthy of consideration.
And finally, as discussed above, it makes sense to pay attention to stock valuations. Buy QQQ – or any investment for that matter – a low valuation and you can do very well! But buy at excessive valuations and you will likely pay the price for that for a very long time.
