Which Is Better for Tech Investors?
-
Nvidia, Microsoft, Apple, and Broadcom are the top four holdings in both QQQ and VGT.
-
VGT has outperformed QQQ over the past decade by over 140%.
-
The high concentration in a few stocks makes VGT a riskier long-term investment than QQQ.
There’s no doubt that over the past decade, the tech sector has been the most rewarding for investors. In fact, nine of the world’s 10 most valuable companies are now tech companies, with each of them having a market cap of at least $1.4 trillion (as of Oct. 15).
There are plenty of tech stocks that make for great investments, but one of the best ways to take advantage of the tech sector’s growth is by investing in a tech-focused exchange-traded fund (ETF). These ETFs provide exposure to the tech sector while minimizing the risks that come with investing in individual tech stocks.
Two tech ETFs that are popular choices are the Invesco QQQ Trust ETF (NASDAQ: QQQ) and the Vanguard Information Technology ETF (NYSEMKT: VGT). Each does a good job at providing exposure to the tech sector, but if you had to choose one, which one should you select?
QQQ is an ETF that mirrors the Nasdaq-100. The Nasdaq-100 is a subset of the Nasdaq Composite, containing the largest 100 non-financial companies trading on the Nasdaq stock exchange. Although it’s not a pure-tech ETF, the tech sector makes up over 60% of the fund.
On the other hand, VGT is more of a pure-tech ETF. It contains 314 companies, all from the information technology (tech) sector. Most of the companies are large-cap companies, but there are mid-cap and small-cap tech stocks included.
The two ETFs share four companies in their top 10 holdings:
|
Company |
Percentage of QQQ |
Percentage of VGT |
|---|---|---|
|
Nvidia |
9.56% |
17.16% |
|
Microsoft |
8.34% |
13.35% |
|
Apple |
8.03% |
13.09% |
|
Broadcom |
5.85% |
4.47% |
Data sources: Invesco and Vanguard. Invesco holdings as of Oct. 10. Vanguard holdings as of Sept. 30.
Both ETFs are weighted by market cap, which is why these megacap tech stocks account for such a large portion of the ETFs.
Both QQQ and VGT have had very impressive returns over the past decade, but VGT has outperformed QQQ by 616% to 468% in that span. This works out to 21.8% and 19% average annual returns, respectively.
VGT data by YCharts.
Much of VGT’s outperformance has come in the past year, particularly with the explosion in growth from Nvidia, which accounts for a large part of the ETF.
There are a couple of things that stand out about VGT. First, its performance over the past decade compared to QQQ’s. Additionally, it’s cheaper than QQQ, with a 0.09% expense ratio compared to QQQ’s 0.2% expense ratio. That 0.11% difference seems small on paper, but it adds up over time to a real difference in returns. If you were to invest $500 monthly into each and average 10% annual returns, you’d pay over $4,200 more in fees in 20 years with QQQ.
