When it comes to investing in exchange-traded funds (ETFs), there are countless options. From broad-market funds to niche, industry-specific ETFs, there’s an investment for every type of portfolio.
If you’re looking to gain exposure to growth stocks, Invesco QQQ (NASDAQ: QQQ) is a popular choice. But there’s another tech ETF I prefer over QQQ: the Vanguard Information Technology ETF (NYSEMKT: VGT). Here’s how the two funds stack up in a few key areas.
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1. Diversification
One of the biggest differences between these two ETFs is their level of diversification. QQQ contains 101 holdings from 10 different market sectors, though around 57% of the fund is allocated to stocks from the tech industry.
The Vanguard Information Technology ETF is devoted entirely to tech stocks, with 319 holdings from all corners of the tech sector. While investing in only one industry does raise your risk, tech stocks often outperform companies from other industries.
2. Expense ratio
A fund’s expense ratio is essentially how much you’ll pay in fees to own that investment. A lower expense ratio is better, and anything over 1% is generally a red flag.
QQQ has an expense ratio of 0.20%, meaning you’ll pay $20 per year in fees for every $10,000 in your account. By contrast, the Vanguard fund has an expense ratio of just 0.09% — less than half of QQQ’s.
While this may not seem like a major difference on the surface, if you eventually build a portfolio worth several hundred thousand dollars, even a slightly higher expense ratio could cost you hundreds or even thousands of dollars more per year in fees.
3. Historical returns
There’s no way to know precisely how any investment will perform over time, as past performance does not predict future returns. However, it can still be helpful to see how the two funds have compared historically.
Over the past 10 years, QQQ has earned an average rate of return of 16.99% per year compared to Vanguard’s 19.79% per year. That may not seem like a significant difference. But if you were to invest, say, $200 per month at each of those rates, here’s roughly what you’d accumulate over time:
|
Number of Years |
Total Portfolio Value: 16.99% Avg. Annual Return |
Total Portfolio Value: 19.79% Avg. Annual Return |
|---|---|---|
|
20 |
$312,000 |
$437,000 |
|
25 |
$700,000 |
$1,095,000 |
|
30 |
$1,551,000 |
$2,719,000 |
Data source: Author’s calculations via investor.gov.
Again, there are no guarantees that either of these funds will continue performing at these rates. Historically, though, the Vanguard Information Technology ETF has a track record of outperforming QQQ by a fairly significant margin.
Keep in mind, too, that while QQQ has underperformed compared to the Vanguard fund, it’s still earned substantially higher returns than the market as a whole.
^SPX data by YCharts.
Which is right for you?
Investors have different preferences, so what’s right for you might not be ideal for someone else. Generally speaking, though, QQQ can be a better fit for those looking for greater diversification and slightly lower risk.
While QQQ carries more risk than, say, an S&P 500 ETF, it’s significantly more diversified than the tech-centric Vanguard Information Technology ETF. Tech stocks also tend to be hit much harder during periods of volatility, so the greater diversification you get with QQQ can make those downturns slightly less stomach-churning.
On the other hand, if your primary goal is to maximize your returns, the Vanguard fund is a fantastic choice. With its higher historical returns and substantially lower expense ratio, you could potentially earn hundreds of thousands of dollars more over time. Just double-check that the rest of your portfolio is well-diversified to avoid leaning solely on one industry.
Both Invesco QQQ and the Vanguard Information Technology ETF are solid investment choices, and they can be smart options for many people. By considering your personal preferences and risk tolerance, it will be easier to decide which one is best for you.
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Katie Brockman has positions in Vanguard Information Technology ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
