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SPY vs QQQ: Which is the better ETF?

SPY and QQQ are two key indexed exchange-traded funds (ETFs) that are offered today.

SPY is the “original” S&P 500 Index offered by State Street Global Advisors. It was the first US ETF listed on a national stock exchange and remains one of the most traded ETFs in the world.

QQQ is a Nasdaq-100 index fund that tracks the performance of the top 100 companies listed on the Nasdaq exchange. QQQ excludes all companies in the financial sector and has a large weight in the technology and consumer discretionary sectors.

In this post, we’ll compare SPY and QQQ’s diversification, performance, fees, and tax efficiency to help you decide which one is right for you.

What is SPY?

The SPDR S&P 500 ETF Trust (SPY) is an exchange-traded fund offered by State Street Global Advisors, which tracks the S&P 500 Index. SPY is often called the original S&P 500 ETF because it was the first US ETF traded on national exchanges. It was created in 1993 and still remains one of the most traded ETFs in the world today.

What is QQQ?

QQQ ETF or QQQ is an exchange-traded fund offered by Invesco. It aims to generate results similar to the Nasdaq 100.

The Nasdaq 100 is an index that tracks the top 100 stocks on the Nasdaq stock exchange, excluding any companies in the financial sector. The QQQ ETF is managed to match Nasdaq’s100 index, rebalancing quarterly and reconstituting annually.

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SPY vs QQQ

SPYQQQEdge
Fund TypeETFETFSplit Decision
DiversificationS&P 500 IndexNasdaq 100Split Decision
Inception Date19931999Split Decision
Number of Holdings503101SPY
Minimum Investment$1.00$1.00Tie
Expense Ratio0.09%0.20%SPY
Tax EfficiencyETFs are generally are more tax efficientETFs are generally are more tax efficientQQQ - SPY generates higher Dividend Yield
Tax Loss HarvestingFunds must settle and may need 1-2 days to be available for reinvestmentFunds must settle and may need 1-2 days to be available for reinvestmentTie
Trading & LiquidityDaily trading during Market HoursDaily trading during Market HoursTie
Performance-18.19% in 2022-32.58 in 2022QQQ
Dividend Yield1.53% in 20230.65% in 2023SPY

Diversification – Tie

VOO and QQQ have very different approaches to their diversification strategy.

VOO aims for returns similar to the S&P 500, which follows the 500 largest companies in the U.S. stock market. On the other hand, QQQ aims to provide results similar to the Nasdaq 100.

The table below shows VOO and QQQ  portfolio diversification by industry.

IndustrySPYQQQDifference
Information Technology28.30%57.10%-28.80%
Health Care12.99%7.12%5.87%
Financials12.77%0.00%12.77%
Consumer Discretionary10.65%18.73%-8.08%
Communication Sevices8.70%5.48%3.22%
Industrials8.29%4.87%3.42%
Consumer Stables6.47%4.23%2.24%
Energy4.53%0.68%3.85%
Materials2.40%0.27%2.13%
Real Estate2.37%0.27%2.10%
Utilities2.50%1.24%1.26%
Multi Sector0.04%0.00%0.04%

The first thing you’ll notice is that while these two ETFs use different indexes, their portfolio has a significant overlap. QQQ has a larger weight in the information sector, the consumer discretionary services sector and no investments in the financials industry. But in most other industries, the differences in weight are not as significant, such as real estate, utilities, and consumer staples.

Overall, if you want more on the information technology and consumer dictionary industry, then QQQ is a better ETF for you. SPY is a better option if you want a more diversified portfolio.

Now, let’s compare the top 10 holdings of VOO and SPY.

CompanySPYQQQ
Apple Inc.7.14%11.06%
Microsoft Corp.7.14%10.31%
Amazon.com Inc.3.44%5.67%
NVIDIA Corp2.86%4.28%
Alphabet Inc. A2.09%3.01%
Alphabet Inc Class C1.80%2.97%
Tesla Inc C1.58%2.76%
Meta Platforms Inc Class A1.90%3.86%
Berkshire Hathaway Inc Class B1.77%
Exon Mobile Corp
UnitedHealth Group Inc1.41%
Broadcom Inc3.07%
Adobe Inc2.18%
Total31.13%49.17%

The table above shows that 8 out of the top 10 holdings are the same between the two finds.

Further, the lowest two positions are different. QQQ has positions in BroadCom Inc. and Adobe Inc., two technology companies, whereas SPY has UnitedHealth and Berkshire Hathaway holdings.

One big difference between QQQ and SPY is the weight of the top 10 holdings. In particular, QQQ’s top 10 comprise 49% of the fund, while SPY only accounts for 31% of the fund. This is mainly because SPY has over 500 holdings while QQQ has about 100.

Overall, QQQ is more concentrated and has fewer holdings, especially in the technology and consumer discretionaries sector. On the other hand, SPY is more diversified between multiple industries and has over 500 holdings.

Minimum Investment – Tie

SPY and QQQ have investment minimums of $1. Both of these funds are highly accessible to investors and available by many brokerage firms, making them easy to invest in. Both funds are also ideal for any investment level.

Expense Ratio – Advantage to SPY

Expense ratios are important because they determine how much you will pay out of your returns to the fund for operating your portfolio.

SPY has the advantage in expense ratio with 0.09% compared to an expense ratio of 0.20% for QQQ.

While the number seems small when you look at both numbers, the difference is quite significant since QQQ’s expense ratio is twice that of QQQ.

As an investor, if you want to pay the lowest fees possible, then SPY is a better option.

Trading and Liquidity – Tie

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

As ETFs you 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).

This benefit of ETFs doesn’t come without drawbacks, though – given that ETFs can trade throughout the day, 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 important to consider the tax implications and not only the returns they generate. The tax implications of an investment can have a huge 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.

Since both VOO and SPY are ETFs, they offer the same tax advantages and efficiencies.

It’s important to consider that SPY generates a higher dividend yield and tax burden. As a result, while SPY is likely to generate higher yearly payments, this will also be accompanied by a higher tax burden.

Tax Loss Harvesting – Tie

As ETFs, both SPY 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. You may have to wait one or two days before you have access to the funds, commonly called T+2.

Performance & Dividends – Edge to QQQ

Performance is one of the most important aspects investors look at when investing in ETFs.

Let’s examine how QQQ and SPY differ in terms of performance and dividends.

Total Returns by NAV
YearSPYQQQDifference
2022-18.17%-32.58%14.41%
202128.75%27.42%1.33%
202018.37%48.62%-30.25%
201931.22%38.96%-7.74%
2018-4.56%-.012%-4.44%
201721.70%32.66%-10.96%
201612.00%7.10%4.90%
20151.25%9.45%-8.20%
201413.46%19.18%-5.72%

In the table above, you can see that, on average, QQQ has outperformed SPY by 5.19% over the last nine years.

Further, QQQ has outperformed SPY in 6 out of the last nine years. While SPY has outperformed QQQ in 2022 and 2021.

Next, let’s look at the cumulative returns of SPY and QQQ over four key time periods.

Cumulative Returns by NAV
YearSPYQQQDifference
1-Yr21.45%35.01%-13.56%
3-Yr10.01%9.51%0.50%
5-Yr9.77%14.83%-5.06%
10-Yr11.77%17.38%-5.61%

In the table above, you can see that QQQ outperforms SPY in 1-year, 5-year, and 10-year periods by an average of  8%. The only exception is that over a 3-year period, SPY and QQQ have nearly identical performance.

Finally, let’s examine the difference in dividend yield between SPY and QQQ.

YearSPYQQQDifference
20231.53%0.65%0.88%
20221.47%0.60%0.87%
20211.33%0.50%0.83%
20201.80%0.66%1.14%
20191.83%0.80%1.03%
20181.79%0.77%1.02%
20171.89%0.91%0.98%
20162.08%1.07%1.01%
20151.94%1.11%0.83%
20141.83%1.34%0.49%
20131.88%1.15%0.73%

The table above demonstrates that SPY outperformed QQQ every year with a consistently higher dividend yield.

Specifically, SPY generated an average dividend yield of 1.76%, while QQQ had an average dividend yield of 0.87% in the last nine years. This means that, on average, SPY has outperformed QQQ by 0.89% in the past nine years.

With that said, if you are looking for a fund that generates the highest returns, then QQQ is a better option. If you want to generate the highest annual income, then SPY is a better option.

SPY vs QQQ: Who Should Invest?

SPY and QQQ are two popular index funds that are offered on the market today.

SPY is an ETF that tracks the S&P 500 index, holds approximately 500 stocks, and is well diversified across all the major sectors in the market. In contrast, QQQ tracks the Nasdaq-100, which follows the top 100 companies on the Nasdaq exchange, excluding any companies in the financial sector.

QQQ holds approximately 100 stocks with a heavy concentration in technology and consumer discretionary. As of October 2023, it held nearly 76% of its stocks within these two industries. As such, QQQ is not as diversified as SPY.

In terms of performance and tax efficiency, QQQ generates better total annual returns and cumulative returns over different periods. SPY, on the other hand, has produced a much better dividend yield performance.

Regarding tax implications, SPY will generate a higher tax burden due to the higher dividend yield. PY nearly doubles QQQ dividend yield, which can have a significant impact on the tax burden it generates. If you are trying to reduce your tax burden as much as possible, if you are not holding these in tax-advantaged accounts, then QQQ is the better option.

Overall, in terms of tax-loss harvesting, trading and liquidity, and investment minimums, these two are very similar. Since they are both exchange-traded funds, many of the same rules and regulations apply.



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