ETF Comparison: QQQ vs VTI

Invesco’s QQQ and Vanguard’s VTI are two popular ETFs and it’s worth examining where these two are similar and where they’re different.

QQQ vs VTI: A quick summary

Both funds have different end exposures, so comparing the two funds is slightly like comparing apples to oranges. 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.
• VTI tracks the CRSP US Total Market Index, so it’s a much more diversified fund with 4,000 holdings across sectors and market capitalizations.
• QQQ has outperformed VTI over multi-year periods (going back 10 years), however it has underperformed in the last year as tech stocks have been hit.
• VTI has lower volatility by virtue of its diversification across the US equity market.
• The dividend yield of both funds is low: QQQ is 0.74% vs VTI’s 1.68%
• 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 VTI tracks the CRSP US Total Market Index, so it’s a much more diversified fund with 4,000 holdings across sectors and market capitalizations. The objective of the index is to capture nearly 100% of the US investable equity market and it is market capitalization weighted. This means if you own VTI, you’re invested in almost every public company in the US which has a market capitalization of greater than $15 million and has a float of greater than 12.5% of shares outstanding.

I had never heard of CRSP before, so I had to look them up. It turns out CRSP is affiliated with the Chicago Booth School of Business, so it does have an impressive pedigree.

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 – nearly 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 74% 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 26% 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.

The VTI on the other hand is much more diversified and balanced across the various sectors. While IT is still a quarter of the holdings, other sectors like Consumer Discretionary, Healthcare, Industrials, and Financials are also well represented in this fund.

Naturally this means that the fund will be a little less volatile than the QQQ which is mainly invested in tech. However the flip side is also that you end up with lower long-term returns as the technology sectors tends be a high-growth and high-profitability sector.

Top 10 Holdings

Let’s look at the top-10 holdings in each of the funds.

A few observations:

• Both funds share the same top-6 holdings (really just 5 companies as Alphabet has two share classes), but have dramatically different allocations to them. The top-6 holdings in QQQ have a total weight of 42% whereas in the VTI it’s just 18.5%.
• Similarly, the top-10 holdings in QQQ account for nearly 52% of the fund’s assets, whereas for VTI it is around 23%.
• Given QQQ’s technology bias, its top-8 holdings are tech names whereas in VTI just the top-6 are tech names. Other quality comapnies like UnitedHealth, Berkshire Hathaway, and J&J make the cut here.

It’s clear from these points that the QQQ is just a heavily concentrated and top-heavy fund whereas VTI is more diversified.

Geographic Allocation

The geographic allocation for QQQ is somewhat bizarre to me. As the table below shows it has nearly 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.

For the VTI, there’s no doubt where all your money will go: it’s 100% invested in the US equity market.

Performance

Given how well the technology industry continues to perform, it’s no surprise that the QQQ has outperformed the VTI over multiple years, despite the worse performance this year.

The price charts for the the last 5-year period and 1-year period of course show the same thing.

The one benefit of being in a more diversified fund is that in market corrections, your drawdown will be significantly lower. There’s a nearly 7%p (~700 bps) difference in just this year alone in the drawdown.

If you wanted to be a little tactical in your allocation, and if you already a own a broad fund like the VTI or SPY, you could shift some of your holdings in to a tech ETF and benefit from capturing a higher upside return when the market turns.

Dividend Yield

Neither fund is a big dividend payer. VTI’s dividend yield (30-day SEC yield) is 1.68% whereas for the QQQ it is 0.74%.

My recommendation to investors is to always focus on the total returns of their investment, which includes both price performance and dividend returns. While there might be legitimate reasons for prioritizing other factors, such as high dividend yield, you may end up sacrificing your total returns. For a graphic example of how much impact this can have, take a look at my comparison of the SPY vs SPYD.

Expense Ratios

Both the QQQ and VTI have very low fees and the difference between the two is negligible. The QQQ charges 0.2% and the VTI charges an astonishingly low 0.03%. This difference of 0.17% amounts to $1.70 on each $1000 invested in the funds. For that reason, I do not think this should be a deciding factor in which fund to choose. The ETF price volatility is higher than that and you’re more likely to make or lose more than that based on what time of day you trade these funds.

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 $1.1 trillion for the VTI!
• Trading liquidity: Both funds are very liquid: QQQ trades an average of 56.7 million shares daily compared to the VTI’s 5.1 million.

Unless you’re a BIG fish with hundreds of 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 fairly large performance gap between the two. As technology firms typically have a higher growth rates and higher profitability compared to companies in the broader economy, it is natural that tech stocks will continue to outperform over the longer term.

In the shorter-term though, it is possible and likely that tech stocks will continue to underperform the 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. However their recovery should be equally swift when these concerns abate and/or they have simply gone down too much that valuation is simply just too cheap.

Having said that, I believe diversification is also important as it reduces portfolio 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.

Which ETF is better QQQ or VTI?

Both funds have different end-market exposures and hence have different expected return and volatility profiles. While QQQ can be expected to outperform over the longer-term, VTI will have likely lower volatility. VTI will also likely outperform the QQQ in down markets, like we have had in 2022.

A well balanced portfolio should have an all-market fund like the VTI or SPY, but it is worth complementing with an international fund like the ACWX, and sector-specific funds like QQQ or others. Depending on your asset allocation profile, you will likely want some fixed income funds, as well as some money market funds for your emergency needs.