The stock market is an excellent way to build long-term wealth, but picking individual stocks isn't right for everyone. Simply put, not all investors have the time and knowledge required to properly research and analyze stocks, and the returns generated over time by passive exchange-traded funds, or ETFs, haven't been too shabby.
With that in mind, the Vanguard High Dividend Yield ETF (VYM -0.58%) and the Invesco QQQ Trust (QQQ -1.78%) are two of the best ETF choices in the market. Here's a side-by-side comparison to help you determine which could be the better fit for your portfolio.
Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF isn't technically restricted to value stocks, nor does it exclude the tech sector. But the ETF focuses on stocks with above-average dividend yields, so you won't find most of the high-momentum tech stocks fueling the Nasdaq's incredible rally in the fund.
Top holdings of the Vanguard High Dividend ETF include Johnson & Johnson (NYSE: JNJ), Procter & Gamble (NYSE: PG), JPMorgan Chase (NYSE: JPM), and Verizon (NYSE: VZ). The idea is that most of the companies in the ETF's portfolio are relatively mature and consistently profitable businesses, not rapidly growing companies in the relatively early stages of realizing their potential. And while the tech sector makes up 10.6% of the fund's holdings, think companies like Intel (NASDAQ: INTC) and Cisco Systems (NASDAQ: CSCO), not high-flying momentum stocks like Amazon (NASDAQ: AMZN) and Tesla (NASDAQ: TSLA).
As the name suggests, one of the biggest reasons you might want to consider the Vanguard High Dividend Yield ETF is income. As of this writing, the ETF has a yield of more than 3.5%. And over the past 10 years, the fund has delivered a respectable, but not spectacular, 11.4% annualized total return. In a nutshell, this fund is built for steady income and strong, reliable total returns over long periods of time.
Invesco QQQ Trust
The Invesco QQQ Trust is the largest Nasdaq index fund on the market and is designed to track the returns of the Nasdaq-100 benchmark index, which includes the largest stocks on the tech-heavy Nasdaq index.
Because it's a Nasdaq index fund, it probably won't come as a surprise that about 45% of the fund's assets are invested in the tech sector. Tech, communications stocks, and consumer cyclical companies account for 83% of the holdings. The fund is market-cap weighted, and like the Nasdaq itself (home of several trillion-dollar companies), it is rather top-heavy. Although it invests in 100 different companies, the trifecta of Apple (NASDAQ: AAPL), Amazon, and Microsoft (NASDAQ: MSFT) make up more than one-third of the ETF's entire portfolio.
The Nasdaq has been on an exceptional run in 2020, and its performance over the past decade has been nothing short of stellar. Over the past 10 years, the Invesco QQQ Trust has generated annualized total returns of 20.5%. To put this into perspective, investors who bought into the ETF a decade ago have achieved 545% total returns.
It also shouldn't come as a surprise that the Invesco QQQ Trust isn't a great income stock. It does have some dividend-paying stocks in its portfolio, like Apple, but most of the larger holdings are still very much in growth mode, and therefore don't regularly distribute income to investors. The ETF's dividend yield as of this writing is less than 0.6%.
Two excellent, but different, choices
The bottom line is that there isn't one right answer to this comparison, and investors will likely do well over time with either (or both) of these. The Vanguard High Dividend Yield ETF is the natural choice for investors who rely on their portfolio for current income, while the Invesco QQQ Trust is likely to be a bit more volatile and is therefore best suited to investors with a long time horizon and a relatively high level of risk tolerance.
It's also worth noting that the Vanguard High Dividend Yield ETF has the lower expense ratio of the two, 0.12% versus 0.20%. I wouldn't call either an expensive ETF by any definition, but it's a difference worth noting.
These are two very different types of ETFs, but both are excellent choices. The question is: Which of these is the better fit for your investment goals?