In this post, I will cover the differences between VGT vs QQQ, which are two popular growth ETFs. I can tell you right off the bat that there is no good or bad ETF. It is a matter of knowing the tradeoffs of VGT and QQQ and making a decision that suits your needs best.
VGT vs QQQ: Asset Sizes, Expense Ratios, Yields
Both funds are well-established and large ETFs managed by respectable investment powerhouses. QQQ had a slight head start and enjoys higher popularity among investors. The assets under management for QQQ are almost 4x bigger compared to VGT. QQQ has a higher expense ratio compared to VGT. Still, expenses are pretty low for the both of them.
VGT vs QQQ: Underlying Indices
As for the underlying indices, VGT tracks the performance of US companies in the technology sector. For this reason, the fund excludes any firm outside of the officially-defined tech sector. For instance, you will not find Amazon (consumer cyclical), Google (communication), Meta (communications) or Tesla (consumer cyclical) in VGT’s portfolio.
QQQ tracks the performance of Nasdaq 100 largest non-financial companies. This means that QQQ does not hold stocks traded on rival exchanges. For instance, QQQ does not have NYSE-listed Oracle or Salesforce in its portfolio. We can argue that such an approach is arbitrary and restricts QQQ’s opportunities. We will come back to this issue in a second.
Market Capitalization Comparison
Next is the size of portfolios companies in VGT vs. QQQ. Unlike QQQ, VGT includes not only large-cap companies, but some mid- and small-cap stocks.
Conversely, QQQ’s holdings are giant or large-cap stocks for the most part. Though, VGT’s exposure to small-caps of 8.4% is very limited, at best.
VGT vs QQQ: Sector Breakdown
Next, let’s take a quick look at sector allocations. Due to the tracking technology sector only, VGT’s holdings are all IT companies. This is not so for QQQ.
For instance, QQQ has a decent allocation to the consumer cyclical sector (Amazon, Tesla). Likewise, Google and Meta get the lion’s share of communication services sector allocation.
Wall Street uses the Global Industry Classification Standard (GICS). GICS groups companies into 11 sectors. The standard is very particular about what classifies as a technology company. Arguably, there is no other company like Google or Meta that leverages tech most. And yet, here we are.
VGT vs QQQ: Top Holdings
Next is the portfolio concentration. In total, VGT tracks about 315 companies. Here are the top 10 holdings of VGT.
You immediately see a high concentration of assets in just 2 stocks: Apple and Microsoft. They account for a whopping 43% of the fund’s total assets. The top 10 holdings account for 60%. If your investment goal is diversification, that’s not a good sign.
Conversely, QQQ has 101 stocks in its portfolio (including 2 classes of Google’s stock). That is more than 3x less than the number of holdings of VGT. And yet, QQQ has a much lower concentration at the top compared to VGT.
We see that Apple and Microsoft account for 18%. QQQ’s top 10 holdings take up 47% of QQQ’s assets. In some sense, QQQ looks more diversified compared to VGT.
Performance Comparison
Next, let’s take a look at the historical performance. While past performance does not guarantee future returns, there is a lot we can learn from it.
The first thing to notice is that both VGT and QQQ have low turnover ratios. VGT’s turnover ratio is 15%, while that of QQQ stands at 22%. This is not surprising, since both of them use a buy-and-hold strategy. Although, VGT leads with a somewhat lower ratio. Low turnover means that there were fewer stocks bought and sold throughout a year. Higher turnover can lead to a higher expense ratio and create a drag on performance long-term.
As for the total returns, VGT and QQQ performed more or less on par for the past 15 years.
Of course, there were some periods of outperformance by VGT, especially for the past three and five years. This is impressive given that VGT does not include such high-flyers as Tesla, Google and Meta. High concentration of Apple and Microsoft allowed VGT to match or even surpass QQQ’s returns.
Risk-Adjusted Performance
As for risk-adjusted returns, the Sharp ratio for VGT was better across 3-, 5- and 10-year periods.
To be honest with you, I am not a big fan of risk-adjusted returns. Many prominent investors, such as Howard Marks, view investment risk as the probability of a permanent loss of capital.
Calculating investment risk requires a lot of judgement and forecasts of future earnings. This is something that modern portfolio theory avoids as too subjective and hard to do. Instead, it focuses on a low-hanging fruit readily available. And, that is price volatility. So, I would be careful with this and not let risk-adjusted returns cloud your judgement.
VGT vs. QQQ: Which is Better?
Okay, so which one is the best choice, especially for a long-term investor? There is no clear-cut answer to this question. The best we can do is to look at differences between VGT and QQQ and see when one will perform better than the other in the future.
1. Concentration
First off, VGT’s high concentration in Apple and Microsoft is a bit worrying. Such high concentration is a double-edge sword. If for any reason these two stocks underperform, QQQ may outshine VGT. The opposite is true. So, if you are looking for diversification, VGT may not be the best choice. QQQ provides a smoother distribution of weights among stocks without being too top-heavy.
2. Magnificent 7 Exposure
Next is the stock selection preference. QQQ gives you exposure to magnificent 7 stocks. Conversely, VGT excludes 4 of them (Amazon, Meta, Google and Tesla). So, if you want to hold all these 7 stocks, VGT is again not for you. If for any reason the four stocks that VGT is missing start outperforming going forward, QQQ may be a better choice.
3. Pure Play on Tech
If you want pure-play on technology sector, VGT is a better choice. As we saw, QQQ provides exposure to other sectors besides tech. For instance, it has holdings in Costco (2.4%) and PepsiCo (1.8%), which are consumer defensive stocks. Likewise, QQQ holds Amgen (1.3%), Vertex Pharmaceuticals (0.9%) and Gilead Sciences (0.9%), giving a healthcare exposure.
4. Small Cap Exposure
The other consideration is exposure to mid- and small-cap stocks. VGT provides some with 8% allocation to small- and micro-cap companies compared to none for QQQ. 8% is of course a lip service to that. If you want exposure to small-cap tech stocks, there are better ETF options out there.
QQQ focuses on large-cap stocks and cuts off all the other small-cap firms traded on Nasdaq. If small-cap stocks on Nasdaq underperform, this would be beneficial for QQQ.
5. Expense Ratio
QQQ has a slightly higher expense ratio of 0.20% compared to VGT’s 0.10%. While insignificant, it may make a small dent over a very long-term periods of time.
Investors Takeaways
So, as we see, it is not all black and white: VGT is good or QQQ is bad. It is a matter of knowing tradeoffs and making the best investment decisions based off that. At the end of the day, holdings composition is what will make a difference in future performance.
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On another note, there is also QQQM, which is a sibling of QQQ. QQQM does everything that QQQ does, but at a lower expense ratio of 0.15%. The thing with QQQ is that it is a unit investment trust as opposed to a regular ETF company. Back in the early days of ETFs, many funds were structured as trusts. This prohibits QQQ from engaging in securities lending, reinvesting dividends among other things.
Conversely, QQQM is a regular ETF company. ETF fund managers use securities lending to earn fees and lower their expense ratios. Because QQQM got launched in 2020, it has a much smaller asset base, but it may catch up to QQQ at some point.