ETFs are a great tool in the toolbox of anyone that is looking to diversify theory portfolios. Just like mutual funds, they consist of a mix of different assets. That being said, unlike mutual funds, which you can buy at the end of each trading day, ETFs can be traded like stocks. This makes them a favorite among many investors due to their increased flexibility.
Another difference between a mutual fund and an ETF is how they are managed. Mutual funds are actively managed, and a fund manager will decide on how these assets are allocated. On the other hand, ETFs are generally passively managed and can be based on a market index. Some examples of ETFs based on a market index are the ones that we’ll be looking into in this article.
Today, we’ll be continuing with the comparisons between different ETFs, and we’ll be comparing QQQ vs. VTI. Unlike some comparisons we have done in the past, these two are quite different. For one, they are managed by different firms and also track different indexes. The QQQ Trust provides investors with exposure to a similar portfolio to the Nasdaq 100 index.
However, the VTI tracks the performance of the CRSP US Total Market Index.
This means that we have quite a lot to talk about. We will give you a quick overview of these and tell you how they both compare to each other. This should give you an idea of both of these should you have your eyes set on getting an ETF.
What Do QQQ And VTI Track?
The first step to understanding both funds is understanding the indexes behind them. As we mentioned, these ETFs track different indexes, so what exactly are these? Let’s take a look:
What Is The Nasdaq 100 Index?
The Nasdaq 100 index, tracked by the QQQ ETF, is a basket of the 100 largest and most actively traded companies on the Nasdaq exchange. Assets in the index are from all different sectors, ranging from technology to healthcare and others. That being said, the Nasdaq 100 excludes financial services from the sectors that it tracks.
Regarding weighting, the technology sector comprises most of the Nasdaq 100, accounting for 56% of the index. Next in importance is consumer services which include restaurants and retail chains. Lastly, you can find those industries like healthcare, industrials, and telecommunications.
What is the CRSP US Total Market Index?
Now, let’s look at the other index of interest, in this case, the CRSP US Total Market Index. This is an index that looks to track the whole of the U.S. market.
Given this, the same tracks shares of 99.5% of U.S. stocks. This is nearly the whole of the market and includes all types of different shares, and what it includes ranges from small-cap stocks to giants such as Apple and Microsoft.
The index currently includes more than 3,700 different stocks with a median market capitalization of $1.4 billion.
What Is QQQ?
So now that we have an idea of the indexes that these ETFs are tracking, let’s look at what the funds are. Let’s start with the Invesco QQQ ETF. As we already mentioned, this tracks the most important 100 actively traded companies on the Nasdaq.
At this time, the QQQ has 102 different holdings and a total of $209.09 billion in assets under management. Of these 102 holdings, the top ten and their corresponding weights are:
- Apple: 11.02%
- Microsoft: 9.98%
- Amazon: 7.83%
- Tesla: 4.53%
- Alphabet ‘C’: 4.02%
- Facebook’ A: 3.81%
- Alphabet ‘A’: 3.79%
- Nvidia: 3.71%
- PayPal: 2.19%
- Adobe: 1.97%
We can see here the importance that the technology companies have had. The most important technology companies that comprise the ‘FAANG’ stocks already cover over 40% of the holdings.
We can confirm this large importance of the technology sector when looking at the sector breakdown:
- Information Technology: 48.40%
- Communication Services: 19.32%
- Consumer Discretionary: 17.30%
- Health Care: 6.62%
- Consumer Staples: 4.79%
- Industrials: 2.69%
- Utilities: 0.87%
Nearly half the weight is in that sector already, while the next one in importance, the communications sector, occupies less than 20% of holdings. Now, the Nasdaq 100 and, subsequently, the QQQ ETF is a reflection of the U.S. economy, and this shows us in great part what areas have grown to dominate the U.S. market in recent times.
Who Manages QQQ?
When looking at an investment opportunity, it’s always wise to check who manages the same. Who are the ones behind QQQ? Let’s take a look at Invesco.
Invesco is an American investment management company based in Atlanta, Georgia. It was created in 1978 through a divestiture by Citizens & Southern National Bank. The firm has a global scope with offices in 120 countries and footholds in the retail and institutional business.
Their mission is to provide investment solutions to and that is their only focus. As of September of 2021, they have a total of $1.5 trillion in assets under management.
In 1999, they launched the Invesco QQQ Trust. Since then, it has become the fifth-largest ETF listed in the U.S. It’s clear to see that they are one of the biggest players in investment solutions.
What is the VTI?
So now that we have an idea of what the Invesco QQQ Trust is, let’s take a look at the Vanguard Total Stock Market ETF or VTI. As we already mentioned previously, the VTI looks to track the CRSP US Total Market Index. As such, it has a much larger variety of holdings than the QQQ ETF.
In that regard, the VTI has a total of 4093 Holdings. This is over 40 times the holdings of the QQQ fund. What does having a larger amount of holdings entail? Well, for one, the portfolio becomes much more diverse. A diverse portfolio minimizes risk quite a lot as your eggs are not all in one basket. Should any individual sector see a sudden downturn or a big company crash, the remaining will compensate for that.
Now, out of the 4093 holdings, the top 10 by weight are:
- Microsoft Corp: 5.30%
- Apple Inc: 5.00%
- Alphabet Inc: 3.60%
- Amazon.com Inc: 3.10%
- Tesla Inc: 1.90%
- Meta Platforms Inc: 1.60%
- NVIDIA Corp: 1.30%
- Berkshire Hathaway Inc: 1.10%
- JPMorgan Chase & Co: 1.10%
- UnitedHealth Group Inc: 0.90%
We can see that there is some difference already. The top 10 only hold 24.90% of the fund’s total net assets as opposed to the 52.85% of the QQQ fund. Also, note that the financial industries are also included in the CRSP US Total Market Index.
So how does the VTI distribute in terms of sectors?
- Technology: 28.20%
- Consumer Discretionary: 16.30%
- Industrials: 13.00%
- Health Care: 12.80%
- Financials: 11.60%
- Consumer Staples: 4.40%
- Real Estate: 3.50%
- Energy: 3.00%
- Telecommunications: 2.60%
- Utilities: 2.60%
- Basic Materials: 2.00%
We can see that the technology sector has a much lesser degree of importance in this fund. At only 28.2%, it is much more secure against any fluctuations in that area. That being said, this also has a downside. Should these technologies continue to be as significantly important as they are currently, the VTI would see fewer returns than the QQQ fund.
Who Manages VTI?
With all this said, let’s look at who manages the Vanguard Total Stock Market ETF. As in the name, the VTI was created by the Vanguard Group.
John C. Bogle founded vanguard as a fund division of the Wellington Management Company in 1975. The fund that venture began with tracked the S&P 500, and the same is now known as the Vanguard 500 Index Fund.
While Bogle retired from Vanguard in 1999, the group remains the largest issuer of mutual funds globally and the second-largest issuer of ETFs. As of 2021, the same has more than $7.50 trillion in assets under management, second only to BlackRock, Inc.
One aspect that sets Vanguard apart is its structure. The company is owned by its funds which are in turn owned by the shareholders. This means that the shareholders are the real owners of Vanguard. This does give it some advantages. It allows Vanguard to charge very low expenses for its funds, even when talking about ETFs that already have low expense ratios.
Vanguard shows immense pride in its stability, low costs, and risk management. They are one of the leaders in passively managed assets, these being mutual funds and ETFs.
QQQ vs. VTI
Now that we have an idea of both ETFs let’s look at how these two compare. First, the obvious thing is something that we’ve already touched upon.
Both ETFs track very different indexes. The QQQ tracks only the top 100 traded stocks in the Nasdaq, so it is more volatile than the VTI. Given that the latter tracks nearly all U.S. stocks, the same is more stable. That being said, this does have its downsides. In times when the markets are bullish, the VTI won’t see great returns.
When looking at what you are investing in, you do still need to check on expense ratios. In this case, the structure of VTI does give it a boost. With a low expense ratio of only 0.03%, this is much lower than QQQ at 0.2%. These are still low fees, but you expect to be paying less when we’re talking about passively managed funds.
Why is this expense ratio important? If you are investing in the ETFs long-term, these fees will eat into your earnings. Let’s give an example and see what difference you would be paying in fees between both funds. This difference between the 0.2% and 0.03% expense ratio is 0.17%.
Let’s consider that we initially invested $100,000 and added a yearly contribution of $10,000 over 30 years. How much is this difference that we will be paying in expense fees between both? This 0.17% difference will add up to being approximately $139,000 just in fees. This is why it’s so important to look at these ratios.
That being said, that doesn’t mean that you shouldn’t invest in QQQ. If the same outperforms VTI significantly, you can easily make up that difference in fees. So how have they been performing over time? In this regard, QQQ has significantly outperformed VTI over the years. That being said, VTI is much less impacted in bear markets and is a better investment for someone more risk-averse.
With all this being said about both funds, what are our final thoughts regarding them? Who wins out when comparing QQQ vs. VTI? The thing is that it’s difficult to say, and both funds are different investments.
For one, VTI has much greater diversification, and this means that in times of market upticks, the fund won’t see the same performance as QQQ. In addition, it has a lower investment in the technology sector, and this will be a little more attractive to those who are still interested in the sector but don’t want to go too deep.
If you are not that interested in the large diversification and are looking to see york returns on that investment, QQQ may be of bigger interest. That being said, this increased volatility will leave you more impacted in times when the markets falter. Just looking at the beginning of 2020 should tell you enough, and the downtrend had a larger impact on QQQ than it did on VTI.
All in all, both funds are great investments, and both have seen great returns in these recent times. That being said, there is no guarantee that the current upward trend will continue in the future. As we always say, past performance does not guarantee future success.
We hope to have given you a quick insight into both Exchange Traded Funds. Hopefully, this gives you an idea of what you can expect and what both bring to the table. If you are interested in learning about other ETFs, make sure to check out our investing section!
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