If you haven’t been living under a rock, you’ll be well aware of the information technology sector’s importance in our lives. Technology stocks are a great and important part of anyone’s investment portfolio nowadays, including VGT and QQQ.
Tech ETFs are, therefore, a smart choice for investors looking for exposure to the I.T. sector. Tech ETFs allow you to gain access to various leading companies in the sector.
This is why we’re reviewing the same here in Turbowallet. In this article, we’ll look at two great investment options and compare them. We’ll be comparing VGT vs QQQ. We’ll be telling you what these funds hold, who manages them and what they’re tracking.
Once we know them separately, we can compare how they stack up to each other. How are fees structured, and how have they performed over the years? These are all things that we’ll be looking into and should give you an idea of which you’d rather be investing into.
What is VGT
Let’s get the party started by looking at VGT. VGT is the Vanguard Information Technology ETF, and it looks to track the performance of the top companies in the information technology sector. The fund is entirely passively managed, thus offering very low expense ratios.
What Does VGT Track?
So what exactly does VGT base its fund on, and what does it track? The ETF is based on the MSCI US IMI Information Technology 25/50 index. This index developed by Morgan Stanley Capital International is designed to capture the large mid and small-capitalization segments of the tech U.S. equity market.
Given that the technology sector has had a massive improvement over the years, the index has outperformed the likes of total market indexes in recent years. This fund is quite important in this regard.
If we compare VGT to the Vanguard Total Stock Market Index Fund ETF, we can see that the former has outperformed significantly. That being said, given that the same is so highly specific to the tech market, it is highly susceptible to any changes in the same.
If you are interested in looking into a Total stock market index, check out our article comparing QQQ to VTI.
What Does VGT Hold?
Now, let’s take a look at what the ETF holds. While the same has a total of 362 different holdings, the top ten of these are:
|Apple Inc: 20.60%||Microsoft Corp: 17.80%|
|NVIDIA Corp: 6.20%||Adobe Inc: 2.40%|
|Visa Inc: 2.30%||salesforce.com Inc: 2.10%|
|Mastercard Inc: 2.10%||Cisco Systems Inc: 1.70%|
|Broadcom Inc: 1.70%||Accenture plc: 1.70%|
These ten companies make up 58.60% of the total net assets. That being said, it’s not surprising that Apple and Microsoft are the largest holdings of the technology fund. These two tech giants are the two most valued companies in the U.S. Thus, they make up for more than a third of the fund at 38.40%.
The next holdings are much less significant percentage-wise. At 6.2%, the hardware company Nvidia holds only a third of the company above it.
In terms of sector diversification, the same is represented as:
|Systems Software: 22.00%||Technology Hardware, Storage & Peripherals: 21.80%|
|Semiconductors: 18.40%||Application Software: 13.40%|
|Data Processing & Outsourced Services: 9.70%||I.T. Consulting & Other Services: 3.40%|
|Semiconductor Equipment: 3.30%||Communications Equipment: 2.80%|
|Internet Services & Infrastructure: 2.20%||Electronic Equipment & Instruments: 1.20%|
|Electronic Components: 0.80%||Electronic Manufacturing Services: 0.70%|
|Technology Distributors: 0.40%|
Now, we can see that the term Information Technology is quite broad in this ETF. We’re not restricted to the software and hardware technologies you would expect. You can find the electronic payment services, represented by Visa and Mastercard, and telecommunications companies like Cisco.
Who Manages VGT?
Lastly, it’s important to know which company is behind a fund. Who is the Vanguard Group? The Vanguard Group was founded in 1975 by John C. Bogle as a division of the Wellington Management Company. Since their founding, their main focus has been set on helping investors achieve their investment goals.
Given that the firm is investor-owned, they have no other parties to answer to but the investors. All their decisions are made first and foremost with their investors in mind. This means that one of their main goals is to keep investing costs as low as possible. This has made Vanguard one of the leading investment firms today and the second-largest issuer of ETFs.
What Is QQQ?
On the other side of the VGT vs QQQ ring, we have QQQ. What is this fund? This is Invesco QQQ, previously known as the PowerShares QQQ Trust ETF and more informally, the triple-Qs or the cubes. While the fund does not exclusively hold information technology funds, it is used as a lookover of how well this sector is doing.
What Does QQQ Track?
So what exactly does QQQ track? How does this ETF take this snapshot of the technology sector?
QQQ follows the Nasdaq 100 Index. This is a basket of the 100 largest and most actively traded companies on the Nasdaq exchange.
While the same is heavily weighted to the tech sector, it does not track these exclusively. Assets in the index are from all different sectors, including healthcare, consumer goods, and even the industrials.
The Nasdaq 100 is a weighted index that holds companies according to their market capitalization. This means that the largest companies won’t overflood the index, and there is space remaining for the smaller ones.
Nasdaq reviews the index’s composition every quarter to make sure that the same is still weighted according to what the index looks to achieve.
What does QQQ Hold?
So now, let’s take a look at what QQQ holds. How does the ETF track the index? As you’d expect from an index called the Nasdaq 100, the same and QQQ track 100 (more like 102) different holdings. Of these, the top ten in weight 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%|
These 10 companies already make for over 52% of the fund’s total weight. While it may not be a purely Information Technology fund, it can still be considered a good benchmark. We can further show this when looking at the sector distribution:
|Information Technology: 48.40%||Communication Services: 19.32%|
|Consumer Discretionary: 17.30%||Health Care: 6.62%|
|Consumer Staples: 4.79%||Industrials: 2.69%|
Here we can see what we were talking about. The I.T. sector makes for nearly half of the fund itself. If we consider the communications services in that as well, this makes 67.71% of the weighting of the ETF.
Some companies that could usually be considered in the Information technology sector are classified differently. Both Meta (Facebook) and Alphabet (Google) are classified under the ‘Communication Services’ category. Even when considering that, Amazon is classified as ‘Consumer Discretionary’.
When looking at the top ten in holdings, you would think that over 52% are entirely in the Information Technology sector. That being said, this also explains why those companies are not represented in VGT. Given that these companies are not technically Information Technology companies, they aren’t included in the I.T. fund.
Who Manages QQQ?
Invesco is the firm behind the triple-Qs ETF. They are an American Investment Management firm based in Atlanta, Georgia. The same was created in 1978 as a Citizens & Southern National Bank divestiture.
Their first and foremost mission is to provide investment solutions to their investors, companies, and institutional investors. The firm has a global scope with offices in 120 countries and footholds in the retail and institutional business.
In 1999, they launched the Invesco QQQ Trust. Since then, it has become the fifth-largest ETF listed in the U.S. This firm is well established in the investing space. Their trust is evidenced by their $1.5 trillion in assets under management as of September 2021. It’s clear to see that they are one of the biggest players in investment solutions.
VGT vs QQQ
Now that we’ve taken a look at both ETFs, let’s see how they both compare to each other. What does VGT vs QQQ look like? How do they stack up?
First, let’s look at the basics. Both are ETFs which means that they have no minimum investments. Although you would be limited to buying 1 share, you can use services to access fractional shares. Fractional shares services let you buy parts of a share when you can’t reach the price of a full one.
Second, let’s take a look at expense ratios. QQQ has an expense ratio of 0.2%, while VGT will have you paying 0.1%. This means that you would be paying double the expense ratios when investing in QQQ over VGT. Why is this important, and how does this translate?
Let’s take a look. Let’s consider a case where you start with an initial investment of $100,000 and contribute $10,000 each year. What will you be seeing in a 30-year period? After paying that extra 0.1%, you will have roughly $82,000 less in your account. This added expense does not include purchasing and sales costs for your shares.
Given that both ETFs have been around for a while, we have enough data to make a reasonable comparison. So let’s look at how these funds have been tracking over the years. Here we can see that VGT has been outperforming QQQ over the recent years. When checking the performance by the market price, we can see the following:
In the 1 year, VGT has seen returns of 34.46% compared to the 29.32% returns of QQQ. Over 3 years, these also compare to 36.26% of VGT to 25.34% of QQQ. This trend has continued even in the 5-year range, where VGT outperformed 31.46% to 25.65%. Lastly, over 10 years, they have performed very similarly, with VGT seeing annual returns of 23.23% compared to 22.36% of QQQ.
With all this being said, both funds are great investment products. Both have significantly outperformed the S&P 500 and the Total Market Indexes, as we represented with VTI. That being said, do remember that these are funds that would work best in a bullish market. Both funds would underperform the S&P 500 during a bear market.
Comparing VGT vs QQQ, the former has emphasized a single sector, in this case, the technologies. In this matter, QQQ is more diverse sector-wise, even if it has a lower total amount of holdings.
Another point where these differ is the capitalization of their holdings. QQQ only holds 100 companies. This means that it naturally excludes small-cap stocks. According to the Fama and French Three-Factor Model, small caps outperform larger companies in the long run. That being said, VGT does include small-cap stocks in their fund if they are in the tech sector.
Final Thoughts on VGT and QQQ
With all that being said, it’s clear that deciding which the Best Tech ETF is, is a little more nuanced than you would initially think. Given that they are quite a lot different, you need to make some decisions when considering them both.
If you are looking to invest in the most hardcore and technically ‘Information Technology’ sector companies, you matt consider VGT. However, if you think that Communications should be placed in that category, your choice would change. In that case, if you want to invest in Google and Facebook as well, you may consider QQQ.
All in all, both are great investment options for anyone looking at the tech sector. This has been one of the American industry hallmarks over the past two decades and does not look like it’s stopping any time soon.
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