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VUG vs QQQ: Which is the better ETF?

VUG and QQQ are two ETFs highly concentrated in three sectors, with the largest information technology sector for both.

VUG is an ETF dedicated to tracking the performance of large-cap growth stocks. At the same time, QQQ follows the Nasdaq 100 and, as a result, has a high concentration in the information technology sector.

Should you invest in VUG or QQQ?

In this post, we’ll compare VUG and QQQ’s diversification, expense ratio, tax efficiency, and performance to help you decide.

 

What is VUG?

VUG is the Vanguard Growth ETF that tracks the performance of the CRSP US Large Cap Growth Index.

The index aims to generate returns similar to those of the major large capitalization growth stocks listed on the US stock market. Growth stocks are determined by selecting companies with higher price-to-book ratios and higher forecasted growth.

VUG is a passively managed fund that follows a full-replication strategy. This means that it aims to replicate the Index fund directly without any active management.

 

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What is QQQ?

QQQ ETF or QQQ is an exchange-traded fund offered by Invesco. It’s managed to match the Nasdaq 100 index, rebalancing quarterly and reconstituting annually. 

The Nasdaq 100 is an index that tracks the top 100 stocks on the Nasdaq stock exchange, excluding any companies in the financial sector. 

 

VUG vs QQQ

 

Fund TypeETFETFSplit Decision
DiversificationCRSP US Large Cap Growth IndexNasdaq 100QQQ
Inception Date20041999QQQ
Number of Holdings221101VUG
Minimum Investment$1.00$1.00Tie
Expense Ratio0.04%0.20%VUG
Tax EfficiencyETFs are generally are more tax efficientETFs are generally are more tax efficientTie
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-31.13% in 2022-32.58 in 2022QQQ
Dividend Yield0.62% in 20230.64% in 2023Tie

 

Diversification – QQQ

In this section, we’ll compare VUG and QQQ’s diversification strategy, examining the table below.

 

IndustryVUGQQQDifference
Information Technology53.10%50.41%2.69%
Communication Services1.00%15.77%-14.77%
Consumer Discretionary21.00%13.80%7.20%
Health Care8.10%6.46%1.64%
Consumer Stables0.70%6.28%-5.58%
Industrials8.80%4.76%4.04%
Utilities0.20%1.24%-1.04%
Energy1.50%0.52%0.98%
Financials2.40%0.49%1.91%
Real Estate1.80%0.27%1.53%

 

Overall, both portfolios have a heavy concentration in the information technology and consumer discretionary sectors. QQQ is more concentrated in the information technology, communication services, and consumer discretionary sectors, accounting for approximately 80% of the portfolio. 

The three primary sectors for VUG are information technology, consumer discretionary, and industrials which account for approximately 83% of the portfolio. 

Overall, both portfolios are heavily invested in three key sectors, which is not a very diversified portfolio for either ETF.

 

CompanyVUGQQQ
Apple Inc.13.00%11.16%
Microsoft Corp.12.88%10.48%
Amazon.com Inc.6.33%5.68%
NVIDIA Corp4.90%4.54%
Meta Platforms Inc Class A3.43%3.91%
Broadcom Inc3.16%
Alphabet Inc Class A3.77%3.02%
Alphabet Inc Class C3.172.99%
Tesla Inc2.78%2.61%
Adobe Inc2.21%
Eli Lily & Co2.43%
Visa Inc Class A1.88.%
Total54.57%49.76%

 

The table above shows that VUG and QQQ hold 8 or the same top 10 holdings. Overall, VUG is more concentrated in the top 10 holdings, which account for approximately 55% of the portfolio, while QQQ’s top 10 holdings account for 50% of the portfolio.

One important note is that the top 4 holdings for both VUG and QQQ are the same stocks, accounting for 37% of VUG’s portfolio and 32% of the QQQ portfolio.

Overall, QQQ has the advantage here since it is more diversified among the top 10 holdings, although it holds roughly 100 fewer stocks.

 

Minimum Investment – Tie

VUG 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 QQQ

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

VUG has the advantage in expense ratio, with an expense ratio of 0.04% compared to an expense ratio of 0.20% for QQQ. When comparing Vanguard ETFs with other companies, they typically have the advantage in terms of expense ratio, which is also true here.

While the number seems small when you look at both numbers, the difference is quite significant since QQQ’s expense ratio is five times higher than VUG.

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

 

Trading and Liquidity – Tie

Both QQQ and VUG 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 VUG and QQQ are ETFs, they offer the same tax advantages and efficiencies.

It’s important to consider that VUG generates a higher dividend yield. This means that VUG will generate higher annual distributions and the accompanying higher tax burden as well. You should only consider this if you will be holding VUG or QQQ in a taxed account. Otherwise, in a tax-advantaged account, these differences are eliminated.

 

Tax Loss Harvesting – Tie

As ETFs, both VUG 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 –

Next, let’s examine how QQQ and VUG differ in terms of performance and dividends.

 

Total Returns by NAV
YearVUGQQQDifference
2022-31.13%-32.58%1.45%
202127.26%27.42%-0.16%
202040.16%48.62%-8.46%
201937.26%38.96%-1.70%
2018-3.32%-0.12%-3.20%
201727.80%32.66%-4.86%
20166.13%7.10%-0.97%
20153.32%9.45%-6.13%
201413.62%19.18%-5.56%

 

The table above shows the annual returns for both VUG and QQQ. You can see that over the last nine years, QQQ has outperformed VUG in eight of those years. Over those eight years, QQQ has outperformed VUG by 3.88% on average. The only year that VUG outperformed QQQ was in 2022, and only by 1.45%.

 

Cummulative Returns by NAV
YearVUGQQQDifference
1-Yr27.97%35.01%-7.04%
3-Yr6.75%9.51%-2.76%
5-Yr11.94%14.83%-2.89%
10-Yr13.55%17.38%-3.83%

 

The table above shows the cumulative returns for both funds. We can see that at each time period, QQQ has outperformed VUG. On average, QQQ outperforms by 4%, but over long periods, QQQ consistently outperforms by 2% or greater. 

Overall, QQQ generates higher annual returns and cumulative returns compared to VUG.

 

YearVUGQQQDifference
20230.62%0.64%-0.02%
20220.60%0.60%0.00%
20210.57%0.50%0.07%
20200.85%0.66%0.19%
20191.12%0.80%0.32%
20181.11%0.77%0.34%
20171.26%1.34%-0.08%
20161.31%1.14%0.17%

 

The table above shows the dividend yield for both funds. We can see that overall, VUG generates higher dividend yields than QQQ. VUG has outperformed QQQ in six of the last eight years. 

But in those years, VUG only generated a 0.18% higher dividend yield. While VUG generates higher dividend yields, the differences are marginal, generating similar returns overall. 

Overall, QQQ has an advantage in returns, but it performs similarly in dividend yield. 

 

VUG vs QQQ: Who Should Invest?

VUG and QQQ are two ETFs with different diversification strategies, yet they both invest a large proportion of their portfolio in the information technology sector.

QQQ is more concentrated in the information technology, communication services, and consumer discretionary sectors, accounting for approximately 80% of the portfolio. The three primary sectors for VUG are information technology, consumer discretionary, and industrials, which account for approximately 83% of the portfolio.

Overall, both portfolios are heavily invested in three key sectors, which is not a very diversified portfolio for either ETF. However, QQQ has the advantage in its top 10 holdings, where it’s more diversified, although it holds 100 fewer stocks than VUG.

Another important consideration is the expense ratio. Vanguard offerings are nearly unbeatable in their expense ratios. QQQ expense ratio is five times higher than VUG. As a result, this difference in expenses can have an impact on long-term investors and at significant investment amounts. VUG is the better option if you want to minimize your expenses.

Finally, in terms of performance, QQQ has an advantage in total returns. Overall, QQQ has outperformed VUG in total and cumulative annual returns. On the other hand, in terms of dividend yield, both funds perform very similarly, with VUG having a marginal advantage.

Overall, both funds are very similar. If you want to maximize returns, QQQ might be a better option, but to minimize the cost you would incur, VUG is the better option.

 

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