ETF Comparison: Invesco QQQ ETF (QQQ) Versus SPDR S&P 500 ETF Trust (SPY)

QQQ vs SPY: Total Cost of Ownership

In terms of expense ratios, SPY takes the lead with a significantly lower expense ratio of 0.0945%, compared to QQQ's 0.20%.

Both ETFs are highly liquid, but SPY also has the edge in terms of bid-ask spreads, boasting a narrow 0.002% spread versus QQQ's 0.004%.

Combining these factors, SPY emerges as the more cost-effective ETF for both long-term ownership and active trading.

QQQ vs SPY: Methodology and Holdings

QQQ tracks the Nasdaq-100, which includes the largest 100 non-financial companies listed on the Nasdaq exchange, weighted by market capitalization. This index has a significant focus on technology and consumer discretionary sectors.

On the other hand, the S&P 500 is a broader index encompassing 500 of the largest U.S. companies selected by an S&P committee. These companies are screened for positive earnings, size, liquidity, and sector representation, including all 11 sectors.

The result is that SPY offers much broader sector exposure compared to QQQ. SPY includes significant weights in financials, health care, industrials, and energy, among others, while QQQ heavily overweighs technology and consumer discretionary sectors and completely excludes financials.

Top 15 holdings of each ETF show some similarities in the so-called "magnificent seven"—Apple, Microsoft, Nvidia, Amazon, Meta Platforms, Tesla, and Alphabet.

However, SPY also includes diversified heavyweights like Exxon Mobil, Visa Inc., Berkshire Hathaway, and JP Morgan Chase, which are excluded from QQQ due to the Nasdaq-only and non-financial company rules.

Furthermore, SPY is less top-heavy, with the top 15 holdings accounting for 39.79% of the portfolio, compared to 57.55% for QQQ.

If you're looking for broad diversification, SPY is the clear winner. For mega-cap growth exposure with a tech tilt, QQQ is the better choice.

QQQ vs SPY: Risk and Return

Over the past three, one, and year-to-date periods, QQQ has consistently outperformed SPY. This outperformance is not surprising, given the recent dominance of large-cap, growth stocks, and technology, which QQQ emphasizes. Both ETFs have also enjoyed substantial popularity, growing significantly with steady inflows totaling billions of dollars.

However, examining the long-term performance from 1999 to the present reveals a more nuanced picture. The backtest below shows that most of QQQ's outperformance has occurred since 2016. Before then, an investor in QQQ would have lagged behind SPY.

This disparity is largely due to the tech sector's terrible performance during the dot-com bubble, where QQQ suffered a massive 82.98% drawdown, coupled with substantially higher volatility, boasting a 27.23% standard deviation.

In recent years, the risk associated with QQQ remains markedly higher, with a higher three-year standard deviation and maximum drawdown. This was most notably observed during the 2022 bear market characterized by rising interest rates and high inflation, which severely impacted tech and growth stocks.

For these reasons, I prefer SPY. Overweighting tech represents an uncompensated risk, and based on Fama-French factors, I would expect value to outperform growth and smaller stocks to outperform mega-caps. This balanced exposure is where SPY excels.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.