Investing in Tech ETFs: A Comparison

Nvidia, Microsoft, Apple, and Broadcom are among the top four holdings in both the QQQ and VGT exchange-traded funds (ETFs).

Interestingly, VGT has significantly outperformed QQQ by more than 140% over the last decade. However, this concentration on a small number of stocks makes VGT a riskier long-term investment compared to QQQ.

It’s hard to ignore that the tech sector has been a lucrative area for investors in recent years. Of the ten most valuable companies worldwide, nine are tech firms, each with a market capitalization of at least $1.4 trillion as of mid-October.

To fully capitalize on the growth in technology, many investors turn to tech-focused ETFs. These funds can minimize risks compared to buying individual stocks. Among the popular choices are Invesco QQQ Trust ETF and Vanguard Information Technology ETF. Both provide solid exposure to the tech sector, but if you had to pick one, which would it be?

Looking at QQQ, it’s focused on the Nasdaq-100. This includes the largest non-financial companies on the Nasdaq exchange, meaning over 60% of its holdings are in tech, but it’s not entirely tech-focused. VGT, in contrast, is purely tech-oriented. It includes 314 companies solely within the information technology sector, encompassing large, mid, and even small-cap stocks.

Interestingly, both ETFs share some common ground in their top holdings. Here’s a quick comparison:

Both funds are market cap-weighted, so these significant tech stocks make up a hefty portion of each ETF. When looking at their returns over the past ten years, both have performed admirably. VGT outpaced QQQ with a return of 616% compared to QQQ’s 468%, leading to average annual returns of 21.8% and 19%, respectively.

Much of VGT’s success lately can be attributed to booming tech stocks like Nvidia. But there are some notable characteristics of VGT. For one, its cheaper expense ratio of 0.09% compared to QQQ’s 0.2% may seem minor but actually accumulates to significant differences over time. For instance, investing $500 monthly in each with a 10% average return could lead to paying over $4,200 more in fees with QQQ over 20 years.

That said, I lean towards QQQ as a better choice due to its diversification. It’s worth considering that Nvidia, Microsoft, Apple, and Broadcom alone make up nearly half of VGT. While this concentration has benefited VGT, any downturn in these companies could impact it significantly, especially given their high valuations.

QQQ does hold these heavyweights too, but it also diversifies with non-tech companies that can buffer against tech downturns. So, while QQQ offers great exposure to leading tech companies, its performance isn’t solely tied to them, making it a more balanced option for long-term investors.

If you’re contemplating an investment in Invesco QQQ Trust, keep these factors in mind.