VOO Vs QQQ: Which ETF Is The Better Buy? (2024)

"To every thing there is a season, and a time to every purpose under the heaven." - Ecclesiastes 3.

The Vanguard S&P 500 ETF (NYSEARCA:VOO) and the Invesco QQQ ETF (NASDAQ:QQQ) have considerable overlap but often perform very differently. VOO represents the large-cap market contained in the S&P 500 Index; QQQ is the NASDAQ 100 index which is heavy in tech investments. They are broadly correlated in longer-term price movements, but much of the time one does measurably better than the other despite the fact that they share the same long-term trend. The present moment is one of those times. VOO is holding up better during the current market decline. This does not necessarily mean, however, that an investor should automatically pile into the better performer at this or any other moment.

VOO is an ETF based on the S&P 500, a highly diversified large-cap capitalization-weighted index. Capitalization weighting means that the size of positions within the ETF reflects the market cap of the individual companies. As a company's market cap rises, as has happened over a decade with the current tech favorites, a cap-weighted index ETF is required to buy more of it. Because of this, the big winners rise to the top of all cap-weighted indexes. The S&P 500 Index is the mainstay of many institutional portfolios and is a leading retirement account option. With its extremely low cost of 0.03%, VOO is a cheap way to own the large-cap market segment. Warren Buffett himself has left instructions in his will that the assets set aside in trust for his wife be invested 90% in the Vanguard S&P 500 index fund.

The Invesco QQQ ETF is also cap-weighted, but is based on the newer and faster-growing parts of the market contained in the NASDAQ 100, an index which has a strong tilt toward technology. Two related factors make for differences in performance of the VOO and QQQ. The first of these factors is "beta," a measure of volatility. The market as a whole has a beta of 1. Stocks with a value greater than 1 are more volatile than the market. This means that they will go up more than the market when the market goes up and go down more than the market when the market goes down. The NASDAQ 100 has a higher beta than the S&P 500. QQQ is thus more volatile than VOO.

The chart below shows a comparison of the QQQ and SPY over the past decade with a graph of the 10-year beta in the section below. The QQQ had a beta ranging from about 1.15 to 1.08. Even a cursory glance shows that QQQ goes up faster when the market goes up and comes down harder when the market goes down.

The period from early 2012 to the present reveals the other important factor in comparative performance of QQQ and VOO. The past decade was generally a period in which growth performed better than value. The QQQ (NASDAQ 100) is the primary "growth" ETF while the VOO (S&P 500) contains both "growth" and "value" stocks. VOO did very well over the past decade, being up 205.3%, but QQQ did almost twice as well, being up 398.9%. There are several points to consider when taking into account the question of beta and "growth" versus "value."

1. Other things being equal, if you primarily want growth and can accept some volatility, you may prefer the Invesco QQQ ETF.
2. If you prefer growth with some of the stability provided by diversification that includes value stocks, you might prefer to stick with the Vanguard S&P 500 ETF.
3. Other things are rarely equal.
4. The market preference for growth and the market preference for value differ from season to season, sometimes for a decade or longer. Keep this in mind if tempted to project the current trend into the future.
5. A small point. While the expense ratio for VOO is a microscopic .03, QQQ's expense ratio isn't bad either at .20.

A Comparison Of The Top Ten Holdings Provides Subtle Insights

Here's the VOO Top Ten As Of The End of February. Several stocks which are quite close in market cap have since switched around a little since the lists were updated. The most important changes on sites that update more frequently show that Tesla (TSLA) and NVIDIA (NVDA) have fallen while Berkshire Hathaway (BRK.A)(BRK.B) has risen. This is important to note because Berkshire is more of a value stock selling at a moderate price while both Tesla and NVIDIA are high-priced growth stocks. These position changes confirm other measures which show that the market leadership may currently be pivoting from growth to value.

1. Apple Inc 7.09%
2. Microsoft Corp 6.08%
3. Amazon 3.40%
4. Alphabet Inc Class A 2.12%
5. Tesla Inc 1.98%
6. Alphabet Inc Class C 1.98%
7. Meta Platforms Inc Class A 1.93%
8. NVIDIA Corp 1.59%
9. Berkshire Hathaway Inc Class B 1.49%
10. Johnson & Johnson 1.18%

• Total 28.84%
• # of Holdings 510

Here's the QQQ Top Ten.

1. Apple Inc 12.34%
2. Microsoft Corp 10.22%
3. Amazon 7.10%
4. Tesla Inc 3.98
5. NVIDIA Corp 3.91%
6. Alphabet Inc Class C 3.91%
7. Alphabet Inc Class A 3.70%
8. Meta Platforms Inc Class 3.41%
9. Broadcom Inc 1.83%
10. Cisco Systems Inc 1.78%

• Total 52.18%
• # of Holdings 103

The first thing to note about the two lists of Top Ten Holdings is the very significant overlap of the top 8 holdings. The same principle which elevates the weight of big winners applies to both indexes although it exerts a more powerful influence on the smaller QQQ ETF. QQQ contains only 103 stocks versus the 510 of the Vanguard S&P Index ETF. The top eight stocks in the two ETFs were the same as of January 31, but in the QQQ ETF, they constitute 52.18% of the total index while in the VOO Vanguard 500 ETF, make-up only 28.84%. Both numbers are abnormally high at the present moment because of the rapid growth in market cap of the top holdings. This fact has been pointed out by SA writers frequently over the past year, myself included, as a reason to be cautious about both these ETFs and the market as a whole.

It is worth noting that the last two stocks in the VOO ETF Top Ten, Berkshire Hathaway and Johnson & Johnson (JNJ) are much larger than the last two in the QQQ ETF, Broadcom (AVGO) and Cisco (CSCO). Both Berkshire and JNJ are value stocks with great stability and low beta. The stocks below the top ten in S&P 500 Index resembles Berkshire and JNJ more than it resembles the top eight positions in either index. The weight of growth stocks is thus much greater in the QQQ.

The weight of the individual stocks at the top has the same ratio as the ratio of the overall Top. Apple (AAPL), for example, is 12.34% of QQQ versus 7.09% of VOO. That's quite a bit of concentration in both cases. When you buy $100 worth of the QQQ ETF $12.34 of your investment is in Apple. In VOO, $7.09 of your investment is in Apple. This helps explain the fact that the two ETFs can differ quite a bit overextended periods notwithstanding the general similarity in long-term trends.

The Charts Below Show Alternating Periods Of Market Leadership

The first chart repeats the chart above leaving out the chart tracking beta sharpens the picture. Thanks to its focus on growth QQQ outperformed VOO and in a major and increasing way over the past decade until recently:

In the above chart, I extended the start date back to 2011 just to make it clear that the dominance of QQQ and growth stocks didn't really take off until 2014. That's when the legendary FANG stocks, Apple (AAPL), Amazon (AMZN), Alphabet (GOOG)(GOOGL), Netflix (NFLX), and Meta (FB), began to emerge and dominate both indexes. So does growth always win? Should you just buy QQQ and wait for it to double the return of VOO? Not so fast! Take a look at what happened to growth between 1998 and 2009.

In the picture above it was necessary to use the SPDR S&P 500 ETF Trust rather than VOO, which did not yet exist; the two are essentially identical in holdings. What you see is that the famous dot.com stocks which were prominently represented in the NASDAQ 100 (QQQ) had run-up to such an extreme level in the year 2000 that their 80% crash ending in 2003 made them the loser even after a decade. Putting the two periods together, 2000 to the present, provides the following chart:

After the 2000-2003 debacle, it took 19 years for the QQQ to catch up. It was neck and neck for a few years leading up to 2020 when conditions including low rates and the pandemic lockdown catapulted the QQQ to another extreme high. The pandemic helped many companies in the NASDAQ 100 because their services did not require direct human contact and as a result took market share from businesses which did. But how are the two ETFs doing recently?

What you see is that the QQQ which rose so fast and so far from the March 2000 low is now falling faster than SPY in the correction so far this year. In fact, the SPY is down about 11% so far in 2022 while QQQ is down 18% and closing in on the 20% which defines a bear market. Its beta was about 1.14% over the period on the chart, meaning it fell 1.14 times as much as SPY. What goes up fast, goes down fast.

What we have seen in the charts is that recent outperformance can lead to future underperformance as it did in 2000. Will this happen again? What should we expect now? Is QQQ entering a decade of underperformance? That's a matter of conjecture, but the fact that we must ask suggests that we must dig deeper and look at the numbers which define these two indexes and what they might tell us about risks and probable returns going forward.

Tables Containing Important Numbers For VOO And QQQ

The first table from Vanguard compares the rate of return of VOO and QQQ over a number of periods. It puts a specific number on the performance comparisons which are represented in the above charts. One interesting fact to start with is that there is little difference between market price and asset value. As ETFs are based on large indexes, it would be surprising for either to sell at a large discount or premium to asset value. This quality makes both reliable and attractive to investors.

The one-year date shows the beginning of the period in which QQQ began to do worse than VOO. QQQ had previously outperformed on 3, 5, and 10 year time periods. Since its inception in 1999 QQQ had an average return of about 10% per year, thus overcoming the dot-com crash of 2000-2003 as well as the major bear market of 2007-2009. VOO had a much more favorable date of inception, just six months after the 2009 bottom. VOO currently returns an aggregate dividend in the amount of 1.34% while QQQ generates 0.52% in dividend return as reported here on SA.

The numbers in the tables that follow are a month out of date, but the slight difference over six weeks since the last report is too small to matter for the purpose of this analysis. Price to earnings and price to book value ratios would be a bit lower for both, more so for QQQ, which had a larger price decline, but the relative measures should be close enough for practical purposes. The sector holdings would also not have changed materially despite a decline in Technology because of the decline in underlying stock prices.

The equity characteristics in the table below, again from Vanguard, elaborate on a number of other differences between VOO and QQQ. The median market cap of QQQ ($403.8 billion) is double that of V00 ($203.2 billion). The reason is that the smaller number of holdings of QQQ leaves out 400 stocks with much smaller market caps. The QQQ, with its volatile smaller tech stocks, has a turnover rate eight times that of VOO.

Other comparisons provide extremely important information when it comes to assessing the investment merit of the two ETFs. The price-earnings ratio (P/E) of QQQ is about 30% higher than that of VOO. This makes sense when one considers the fact that the eight large growth stocks in the Top Ten of both ETFs have about a 70% greater weighting in QQQ. For the same reason, the price to book value (P/B) is 8.0x for the QQQ versus 4.4x for VOO. These same rapid growth stocks are all capital-light, producing lower book values. This produces a higher price to book ratio along with higher return on equity. A number for the Return On Equity of QQQ is not provided by Vanguard, but using the price to book value one might reasonably estimate it to be 30% or so above the ROE of VOO stocks.

Both of these facts are consistent with the fact that the earnings growth rate for VOO is 22.6% versus 28.9% for QQQ. The comparison of these four important metrics is important to keep in mind when making a choice between the two. QQQ is more expensive but grows faster and has a higher return on capital. At what level is the superior growth too expensive? At what point is superior value overtaken by higher growth? What are the implications for investors of different time frames? I will return to these questions in the conclusion.

The analysis of sector holdings below provides further detail on what creates the differences in performance of the two ETFs. The percentages for VOO are exactly the percentages for the S&P 500 Index and thus reflect the overall makeup of the market for stocks with a market cap larger than about $5 billion. The one major area where VOO weighting is higher than QQQ weighting is in Financials. There is a separate NASDAQ Financial 100 Index (IXF) so that financials are generally excluded from QQQ. The QQQ percentage of financials, 1.46%, is only a little over 10% of the VOO ETF weighting of 13.64%.

The major difference is in the area of Technology where QQQ holdings are 48.49%, almost half of all holdings. This compares to 25.98% in Technology for VOO. This large number is no surprise because of the heavy weighting of the giant technology companies in its Top Ten. QQQ is also 80% bigger in the related area of Communication Services, in which it has 18.54% compared to the rate of 10.04% in the VOO.

QQQ is also significantly higher in Consumer Cyclicals, 15.54% to 11.73%. It's worth noting that Consumer Cyclicals are more heavily weighted in QQQ while Consumer Defensive stocks, which are more stable and conservative, are more heavily weighted in VOO, again confirming that VOO is the more conservative and value-oriented ETF.

What's Happening In The Market Right Now?

Here's the chart comparing VOO and QQQ since January 1, 2022:

VOO led virtually out of the gate. The gap for 2022 has now widened to an almost 8% difference. The S&P 500 Index (VOO), is down 11.61% while the NASDAQ 100 (QQQ) is down 19.35%. Put another way, the market as a whole is in a correction while the NASDAQ 100 will at the end of the day's trading as I write this be in an official bear market. (Glancing at QQQ as I submit this, I see that QQQ is now down more than 21% officially meeting the normal criterion for a bear market.)

Putting the above chart together with the charts in an earlier section it looks as though the market as a whole may have been rolling over during the past six months with a shift in leadership away from QQQ. This pivot away from the tech stocks in QQQ has steepened since the beginning of this year. Investors seem to be in full flight from high-risk, high-growth, high-priced stocks. This observation leads to a number of questions. What are the implications? What are the actions an investor should take? Which ETF is better for the long-term investor?

Conclusion

Taking the very long view, most investors who do not follow the market closely should probably hold the Vanguard S&P 500 ETF or an equivalent fund or ETF. I base this very general suggestion on the same reasons that cause most retirement plans to offer one of the S&P 500 vehicles as a choice. The idea is to own the large-cap market as a whole and to stick to it through ups and downs despite the fact that market leadership changes from time to time. This happens to coincide with the message of the charts at this particular moment.

The same charts suggest that the direction of the market as a whole may be down for a while. Studies based on valuation suggest to many observers that returns for equities, regardless of how they are sliced and diced, are likely to be below normal for the next decade. These predictions may or may not come to pass. The conventional wisdom argues that efforts to time the market have not succeeded for most investors. Buying an instrument like VOO at regular intervals is a good idea at most times, particularly because buying equal dollar amounts accumulates more shares when the market is down. It, therefore, lowers average cost. If you are young enough to have a long investment horizon, this may be the way to go.

The counter-argument is that QQQ historically grows faster over the very long term, and might therefore produce better returns if you have the steady nerves to hold on through bad periods. The 22-year chart shows that QQQ did in fact outperform from 2000 to the present despite two devastating market crashes, one of which focused specifically on the NASDAQ 100 leaders. For the moderately adventurous, a mixture of the two ETFs might juice returns a bit at less risk.

Is there a point where one might buy QQQ specifically because it has been underperforming recently? There is certainly an argument to be made for this. Stocks like Apple, Amazon, and Alphabet may look expensive compared to the value stocks which have lower P/E ratios and are currently doing better. However, if able to grow earnings at 20% or more annually, these high tech growth companies quickly close the gap on valuation. A stock growing at 20% a year and priced at 30 times earnings is selling at a P/E just over 19 times its earnings two years in the future. If you are confident of its future earnings, you might choose it over a consumer defensive stock selling at a 22 P/E for next year's earnings. Taking this principle into account, the QQQ ETF might turn out to be the better bet within the near future.

There's no easy and guaranteed answer when it comes to choosing between VOO and QQQ. Both are good for what they do. As with many investment choices you yourself are the decisive factor. Your choice will be most heavily dependent on your goals, your time frame, and your risk tolerance.

I am a retired professor, a retired investment adviser, and currently a private investor and full-time tennis pro. I bought my first stock in a custodial account in 1958. I am a student of history, particularly military and economic/market history. The intellectual passions of my retirement years have been markets, mathematics, and quantum theory. Recently I have found myself reading book after book on the thoughts and feelings of animals, and I believe they are subtly influencing some of my views. I have a cat I like a lot. I like to travel. I served in Vietnam.