Key Points
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* The Vanguard S&P 500 ETF (VOO) works better as a core portfolio holding, but a lot of people like to use the Invesco QQQ ETF (QQQ) as a tech proxy.
* QQQ, however, selects its stocks based entirely on which exchange they trade on, which isn't a strategy you want to use when building a portfolio.
* Based on diversification, cost, and
market coverage, VOO is better suited as a long-term holding.
The Invesco QQQ ETF (QQQ) is once again making the case for why it's one of the best-performing ETFs of the past two decades. A 19.9% return in the first half of the year, which more than doubled the Vanguard S&P 500 ETF's (VOO) 9.5% return, pushed its total return since inception to more than 1,580%.
By that measure, it may be easy to say that the Invesco QQQ ETF is easily a better investment than Vanguard's index. But investment fit should never come down to historical returns. Sure, it's nice when an ETF performs well, but it's not as important as making sure it's a fit and is aligned with your objectives, risk tolerance, and time horizon.
VOO vs. QQQ: Concentration risk in both indexes
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It's easy to understand exactly why the Invesco QQQ ETF has been the better performer for years: its tech-sector concentration.
While the fund isn't actually a tech ETF, it does have roughly 67% of its assets invested in the sector, including all of the Magnificent Seven and many of the winners so far from the artificial intelligence (AI) boom.
But don't underestimate the concentration risk that exists in the S&P 500, either.
While its roughly 500 individual positions should help ensure a diversified portfolio, it's got nearly 40% dedicated to tech and roughly the same committed to the top 10 holdings. The Vanguard S&P 500 ETF is indeed more diversified, but not by as wide a margin as you might think.
That means both are quite vulnerable to a reversal of the AI trade, an economic slowdown, or any kind of market rotation out of megacaps and tech.
VOO is better as a core portfolio holding
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Because of its broader coverage of the U.S. stock market, the Vanguard S&P 500 ETF works much better as a portfolio cornerstone to build around. Although I'd argue that the Vanguard Total Stock Market ETF is the better core holding due to its inclusion of mid-caps and small-caps. Or the Invesco S&P 500 Equal Weight ETF might be preferable if you're worried about the concentration issue.
QQQ is better as a high-growth satellite holding
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The Invesco QQQ ETF has three factors to consider:
- It's mostly a tech/growth ETF, which means high idiosyncratic risk.
- It only invests in around 100 stocks, limiting diversification.
- Its selection process involves buying only stocks that trade on a specific exchange, which isn't a particularly logical strategy.
The fact that many innovative companies choose to list their stock on Nasdaq means it's heavily tilted toward tech, but there's no real targeting strategy involved. That makes it a questionable choice to build your portfolio around.
VOO is the better long-term holding
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From a portfolio construction standpoint, I think the Vanguard S&P 500 ETF easily works better. It's at least modestly more diversified than the Invesco QQQ ETF and is better suited to handle multiple economic environments.
In the short term, markets are considering geopolitical, inflation, and consumer sentiment risks. While earnings are supporting the current bull market rally, there are enough warning flags out there that investors should at least be considering the downside risk of being heavily invested in tech. If the Fed is unable to cut rates later this year, the markets could have some trouble sustaining the uptrend.
VOO is the better buy for most long-term investors. And honestly, it isn't even close.
