VOO vs QQQ: Which index ETF should you choose? - Physician on FIRE (2024)

VOO and QQQ are two of the most popular Index ETFs on the market. While both are well diversified, have expense ratios under the industry average, and have a long history of performance, there are some key differences.

One of the main differences is the index that they track. VOO tracks the performance of the S&P 500 if offered by Vanguard. QQQ, on the other hand, tracks the performance of the Nasdaq 100 and is offered by Invesco.

How do you decide which ETF is best for you?

In this post, we’ll compare QQQ and VOO. After this article, you will understand the differences in diversification, expense ratio, and performance to help you decide which is right for you.

What is VOO?

The Vanguard 500 Index Fund (VOO) is Vanguard’s S&P 500 index-tracking ETF offering. It is the ETF alternative to Vanguard’s VFIAX, which is a mutual fund.

VOO’s main objective is to generate similar overall returns as the market using the S&P 500 as its index. The ETF is inherently diversified and is generally considered safer than holding individual stocks within an index.

What is QQQ?

Invesco QQQ ETF or QQQ is an exchange-traded fund offered by Invesco that aims to generate results similar to the Nasdaq 100. The Nasdaq 100 index tracks the top 100 stocks on the Nasdaq stock exchange, excluding any companies in the financial sector. The fund is managed to match the indexes quarterly, rebalancing and reconstituted annually.

VOO vs. QQQ Summary

Diversification – VOO

VOO and QQQ are two ETFs that track the performance of the two indexes. VOO tracks the performance of the S&P 500, while QQQ tracks the performance of the Nasdaq 100.

Understanding the differences in these two indexes is important to understanding the diversification strategies.

• The Nasdaq 100 index tracks the top 100 stocks on the Nasdaq stock exchange, excluding any companies in the financial sector
• The S&P 500 tracks the performance of the 500 largest companies traded on US stock exchanges.

Below is the portfolio breakdown by sector for QQQ and VOO as of February 2024. Remember that these portfolios are not fixed and will change according to the rebalancing schedule of each ETF.

From the table above, you can see that QQQ is more concentrated than VOO. QQQ’s top three industries account for 79% of the portfolio, while VOO only accounts for 55%. One similarity between these two ETFs is that the top industry is information technology.

By industry, VOO is more diversified than QQQ.

Likewise, we can look at each fund’s top 10 holdings to see how they differ.

From the table above, we can see the top 10 holdings within the index. VOO and QQQ hold 8 of the same top 10 holdings. Overall, QQQ is more concentrated than VOO, with 46% of the portfolio being in the top 10 holdings. VOO, on the other hand, only holds 31% of assets in the top 10 holdings.

When it comes to diversification, VOO has a clear advantage over QQQ by being less concentrated. VOO is more diversified in both industry diversification and top 10 holdings.

Minimum Investment – Tie

Both VOO and QQQ have a minimum investment of $1.00 to invest. Since these are both ETFs, they can be traded on fractional shares, allowing for even the smallest investment.

Expense Ratio – VOO

VOO has a clear advantage with an expense ratio of 0.03% compared to 0.20% of QQQ.

Vanguard ETFs are known for having some of the lowest expense ratios on the market, especially for their passively managed ETFs. It is important to note that QQQ is relatively inexpensive compared to the industry average, which is approximately 0.25%.

VOO is 88% cheaper than the industry average, while QQQ is only 20% cheaper.

Trading and Liquidity – Tie

QQQ and VOO have the same trading and liquidity characteristics since they are both ETFs.

Investors can buy and sell ETFs throughout the day at any time during market hours. This is not the case with mutual funds, which are only traded at the end of the day based on Net Asset Value (NAV).

ETFs’ trading flexibility doesn’t come without drawbacks, though—they typically trade at prices slightly different from their NAV. This difference is called a bid-ask spread.

ETFs offer an advantage to investors who trade daily or change positions frequently. Since they can trade throughout the day, whereas mutual funds, you have to wait until the day is closed.

Tax Efficiency – Tie

When comparing two different investment options, it’s essential to consider the tax implications and not only the returns they generate. The tax implications of an investment can have a significant impact on which investment generates higher after-tax returns.

Generally, ETFs will have a slight edge from a tax efficiency perspective. ETFs tend to distribute comparatively fewer capital gains to shareholders – these same gains are simply more challenging to manage efficiently from a mutual fund.

Overall, VOO and QQQ are considered to have the same level of tax efficiency.

Tax Loss Harvesting – Tie

As ETFs, both VOO and QQQ have the same rules and regulations.

Tax-loss harvesting is a strategy that involves selling investments at a loss to offset gains (and up to $3,000 in ordinary income). Tax-loss harvesting only matters in taxable investment accounts since you aren’t taxed on capital gains in tax-deferred accounts.

While this strategy can be implemented using any type of investment (stocks, ETFs, mutual funds, or other property), mutual funds have an advantage because of how they are traded.

When you sell an ETF, you’ll have to wait for the funds to settle before reinvesting the proceeds. This is commonly called T+2, and it may take one or two days before you have access to the funds.

If you prefer the tax-loss harvesting rules of a mutual fund, opting for a similar indexed mutual fund might be a better option.

Performance & Dividends – QQQ (Annual Return), VOO (Dividend Yield)

The performance of an investment option is often one of the most critical aspects investors consider.

The performance of these two ETFs will be highly dependent on the performance of the information technology sector. If information technology significantly outperforms other sectors, then QQQ will outperform VOO.

The table below shows the total annual returns between QQQ and VOO.

From the table above, you can see that QQQ has outperformed VOO by an average of 14% in seven of the last ten years. VOO has only outperformed QQQ in three years by an average of 7%. Overall, when it comes to performance, QQQ has a clear advantage.

But while VOO has an advantage over the last ten years, from 2021-2023, VOO outperformed in two out of three years by an average of 8%.

The table below will show the dividend yield for both ETFs.

The table shows that VOO has a clear advantage in dividend yield. VOO has outperformed in terms of dividend yield every year since 2014 by an average of 1.74%. If you want to prioritize dividend yield, VOO is a better option.

QQQ vs VOO: Where Should You Invest?

VOO and QQQ are two ETFs that invest in different indexes. VOO tracks the performance of S&P 500, while QQQ tracks the performance of the Nasdaq 100.

There are some key differences that you need to recognize when investing in these two ETFs.

First, VOO has a clear advantage in terms of expense ratio. VOO’s expense ratio is 0.03% compared to 0.20% of QQQ, which is more than three times cheaper.

Next is diversification. While both ETFs are well diversified, VOO is less concentrated in both industry and top 10 holdings. VOO’s top 3 industries only account for 55%, while QQQs account for 76%. Likewise, VOO’s top 10 holdings account for only 31%, while QQQ’s top 10 holdings account for 46%.

One of the most important factors is performance. In terms of annual performance, over a 10-year period, QQQ outperformed more consistently. But over the last three years, VOO has outperformed in two of the last three years.

It’s important to note that the performance of these two is highly correlated to the information technology sector. As a result, depending on your investment horizon, you should choose an ETF accordingly.

Finally, regarding dividend yield, VOO has a clear advantage with outperformance in the last ten years.

VOO has an advantage in multiple aspects, such as expense ratio, dividend yield, and diversification. On the other hand, QQQ has an advantage in terms of performance over the long term.