We’ve done a number of comparisons on Invesco’s QQQ with other funds. This time we’re looking at QQQ vs Vanguard’s VUG. Both are popular ETFs and in contention for the best growth ETF, so it’s worth examining where these two are similar and where they’re different. Which one would be best for your portfolio – VUG or QQQ? Let’s dive in!
QQQ vs VUG: A quick summary
The two funds have a similar exposure to growth stocks, but there are meaningful differences. 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.
- VUG tracks the CRSP US Large Cap Growth Index and its exposure to tech related names is limited to ~47%. The rest of the allocation is distributed amongst other sectors.
- QQQ has outperformed VUG over multi-year periods (going back 10 years), including in the most recent 1-year period where technology stocks have been hit quite severely.
- By virtue of its diversification, VUG has lower volatility than the QQQ.
- The dividend yield of both funds is low: QQQ is 0.81% vs VUG’s 0.69%. Given the exposure to growth stocks, this is not surprising.
- 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 VUG tracks the CRSP US Large Cap Growth Index, which aims to track the largest growth companies in the US. CRSP’s methodology for picking growth stocks is based on a combination of historical and future – long and short term – earnings growth (EPS growth), historical sales growth, reinvestment rate in the business, and return on assets.
I learnt about CRSP just recently when I was working on the QQQ vs VTI piece and had to look them up then. CRSP is affiliated with the Chicago Booth School of Business, so it does have an impressive pedigree.
The only downside of picking stocks based on historical and forward expectations, without regards to valuation, is that stocks will rotate in and out of the growth bucket based on economic cycles. Leading in to 2023 now, many so-called growth stocks will no longer grow because of a recession; similarly, companies in the utilities and consumer staples sectors will become “growth” stocks because their earnings will not suffer as much as the former! This set up could lead to higher portfolio turnover in the VUG in the coming year or two.
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.
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. This part was surprising for me, mostly due to my pre-conceived notions about what the Nasdaq actually is.
On the surface, VUG has a similar asset allocation, but there are some meaningful differences. The biggest one is actually in how Vanguard/CRSP classify certain companies like Alphabet. S&P classifies Alphabet in the Communication Service sector, whereas Vanguard/CRSP have them in the technology bucket. Most importantly, this means that on an apples-to-apples basis, VUG’s tech sector allocation is significantly lower than that of QQQ.
VUG has a greater exposure to the Consumer Discretionary sector but almost none to Communication Services. VUG similarly has a much higher allocation to Industrials with some spread in to the financials and real estate sectors.
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 VUG is 0.97, which is a meaningful difference. This means that VUG 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.
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 compare the top-10 holdings in VUG and QQQ.
A few observations:
- Both funds have a great deal of similarity in the top-10 names and also to the weight allocated to those names. Both funds have approximately 50% allocated to the top-10 holdings.
- 8 out of the top-10 holdings in both funds are the same. The differences are that QQQ has PepsiCo and Coscto, whereas VUG has Home Depot and Visa.
- The top-6 holdings are virtually identical even in terms of weight.
Given the differences we noted above in the sectoral allocation, it’s clear that while ~46% of the funds’ weights are nearly identical, the balance of the 54% is meaningfully different.
When we examine holdings from position 11 to 20, we see that QQQ continues with greater focus on tech, whereas VUG starts bringing in companies like Thermo Fisher, Walt Disney, McDonald’s, Linde, etc. Of course, there are also overlaps like Texas Instruments and Adobe.
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 VUG, there’s no doubt where all your money will go: it’s 100% invested in the US equity market.
Given how well the technology industry continues to perform, it’s no surprise that the QQQ has outperformed the VUG over multiple years. Surprisingly enough, QQQ has even outperformed VUG in the shorter term despite the fact that technology stocks have done poorly this year.
I guess part of the answer is related to the fact that all stocks bucketed in the “growth” category have also performed poorly this year. As interest rates have climbed, the market has rotated from growth to so-called value stocks. I don’t fully subscribe to these definitions, but for our purposes here, it does help to get the point across.
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 had a similar decline, but the QQQ is ever so slightly better off.
Two points stand out here:
- VUG had a similar drawdown in a down market as QQQ
- VUG had a lower return in an upmarket than QQQ
I had referenced in my article on QQQ vs XLK that it is concerning to me when one fund has lower upside performance and similar or worse downside performance. This indicates that there is some problem with the portfolio construction.
I would understand if a fund underperforms on the upside, but delivers better downside performance. In that case, the fund generates alpha in a down market and can make up for years of underperformance in a short few months or a year when the market is crashing around it. VUG’s worse performance in both up and down markets does raise some yellow/orange flags for me.
Neither fund is a big dividend payer. VUG’s dividend yield (30-day SEC yield) is 0.69% whereas for the QQQ it is 0.81%. The difference isn’t large enough to warrant a discussion; and generally speaking growth investors are chasing stock price appreciation so it’s not even important when comparing VUG vs QQQ.
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.
Both the QQQ and VUG have very low fees and the difference between the two is negligible. The QQQ charges 0.2% and the VTI charges an astonishingly low 0.04%. This difference of 0.16% amounts to $1.60 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 $130 billion for the VUG.
- Trading liquidity: Both funds are very liquid: QQQ trades an average of 56.7 million shares daily compared to the VUG’s 1.3 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.
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 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 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 or two, stocks in other sectors may deliver somewhat better returns in the next year or two.
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 VUG?
Both funds share a similarity in terms of their end exposure to growth stocks. However they achieve this in a slightly different manner – VUG is more diversified across the sectors whereas QQQ is concentrated in technology sector.
If your focus is to just go all-out on growth and you do not care about sector concentration, then QQQ would be the better ETF to chose amongst the two. You may also want to look at some other options for tech ETFs, if you want to focus on tech exclusively as there are better options than QQQ.
If you want to focus on growth but not be hyper-concentrated in tech, VUG will serve you well. Just keep in mind that over the longer run, VUG may continue to underperform QQQ.