Many factors must be considered When building a portfolio with ETFs. Will the portfolio be a conservative one, a more aggressive one, or in the middle? A great way to build a portfolio is using ETFs. They allow you to capture a particular market aspect; for instance, VUG and QQQ are growth ETFs. They hold growth stocks and hope that their portfolio rises. Which ETF is better?
Let's break down VUG vs QQQ.
Vanguard Growth Index ETF (VUG) Overview:
VUG is Vanguard's Growth ETF that holds over 235 different growth companies that are a part of the CRSP Growth Index. With a low expense ratio of 0.04%, you are getting a great ETF with low expenses. VUG has grown by over 36% for over the last year and averaged over 10% since 2004. In the last ten years, it has averaged a growth of 14.84%. With the markets going up and down, a 10% annual growth is a great way to grow your portfolio.
If you are looking to expand your portfolio past your core holdings, then VUG could be the ETF to add a bit more risk with the growth stocks; as you can see, this year alone, the fund has increased over 36%, beating out the S&P 500. It is a good fund that can add more risk to your portfolio.
Invesco QQQ Trust (QQQ) Overview:
QQQ is another excellent growth ETF on the market. It is helped by Invesco tracking the Nasdaq 100. It holds 100 companies that represent growth and tech stocks that are held on the Nasdaq. The fund has a higher expense ratio than VUG, with an expense ratio of 0.20%, meaning the cost is $20 per $10,000 invested.
QQQ happens to be one of the oldest ETFs coming into existence in 1999, and has averaged 9.17% since then, with a 10-year average of 18.33%. QQQ is such a great ETF because it has been around for a long time, and it is a highly liquid stock that many people are on the market. If the expense ratio is too high, choosing QQQM or a tech ETF like VGT may be better. QQQM is QQQ with a 0.15% expense ratio.
Similarities Between VUG vs QQQ
Both ETFs track growth indexes, allowing investors to have a piece of different stocks. They have Apple, Microsoft, Amazon, and Nvidia in their top 4 holdings. If you look at the top 10, the funds are similar in holdings. As you dive a bit deeper, they tend to separate.
Differences in VUG vs QQQ
These two funds differ in many aspects, from portfolio composition to the number of stocks they hold. The differences affect the performance of these two growth ETFs as well.
QQQ has a slightly higher holdings and allocation percentage in Technology compared to VUG. It has almost 60% of the fund's holdings in tech stocks. If you are looking for a sound tech ETF, VGT is a great one that challenges QQQ. VUG has more in Consumer Discretionary and Healthcare, but for the most part, the portfolio compositions are similar.
The Amount of Holdings:
The amount of holdings can often dilute a portfolio and make it more diverse, or it can allow it to have more concentration with a smaller amount of stocks. VUG has a portfolio of 235 stocks, allowing an investor to diversify more and not be too concentrated in one or two stocks. QQQ has 100 stocks, allowing them to have a higher concentration and capture more growth with fewer stocks.
As an investor, you must decide if you can stomach the market's ups and downs or want more diversification.
With fewer stocks, QQQ has performed pretty well over the last ten years, with an average growth of 18.33%, while VUG has grown just 14.83%. Looking over the long term, they have both been relatively similar.
Expense Ratio of VUG vs QQQ
The costs of a fund can be a determining factor for investors. An expense ratio works because it covers the cost of any expenses that come with managing the asset. Since both VUG and QQQ are passive ETFs, the expense ratios are much lower than those like ARKK that are actively managed.
VUG has an expense ratio of 0.04%, meaning it will cost $4 for every $10,000 invested. On the other hand, QQQ has an expense ratio of 0.20%, meaning it costs $20 for every $10,000 invested. If you want QQQ but with a lower expense ratio, you can grab QQQM, which has an expense ratio of 0.15%.
Liquidity of Funds
Both VUG and QQQ have been around for a long time compared to many other growth ETFs on the market. QQQ has been around since 1999, and it has become a significant trading asset. It is one of the most traded funds on the market.
With investors getting into certain investments, they may look at the fund's liquidity. If they are looking at selling covered call options, QQQ would be a better fund to do that with compared to VUG. That is mainly because it is traded more often, and the premiums tend to be much higher.
Performance of the Funds
Many investors look at the performance of funds and stocks to see if they are worth the cost. The performance will be similar, but one fund will win in this category.
From a year ago, VUG has grown by 36.17%, while QQQ has grown by 40.90%. VUG has averaged an annual return of 14.84% over the last ten years, and QQQ has averaged an annual return of 18.33% in that same time.
Clearly, one fund is outperforming the other, but you need to put everything in perspective when determining which fund is right for you.
Which Growth ETF is Best? VUG vs QQQ
As you look at growth ETFs, be mindful that they are riskier and tend to have more significant ups and downs. It can be seen as the tech sector crashed in the Dot Com crash or even during the recent drops in the market. These tend to happen throughout history. If you want to add more risk to your portfolio, you cannot go wrong with adding either VUG or QQQ. They are both ETFs composed of some of the most popular growth stocks, allowing you to get a piece of the value rise.
Both ETFs have their place. VUG is on the much cheaper side of things with a lower expense ratio. It also has more stocks, giving it more diversification. QQQ is more liquid for those looking to sell options; that could be a good choice. Over the past few years, QQQ has performed well compared to VUG.
Which Growth ETF is the Best? That is a great question. Each investor is different and has different thoughts on what their portfolio should be. This information can help you make the best decision for your portfolio.
I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.