Square (NYSE:SQ) is a fintech growth company that pioneered small business payment solutions, it is moving aggressively into consumer payments, investments, and transfers with its Cash App. Many people are bullish about the fintech industry and Square's competitive position within it. However, the Nasdaq is comprised of some heavy-hitters that have delivered stellar performance both in terms of business fundamentals and shareholder returns.

Choosing between the two depends entirely on your tolerance for risk and the composition of your existing stock portfolio. Consider the following factors before making a decision.

Shrugging woman making a decision, symbolized by A and B in the air above her

Image source: Getty Images.

Square provides growth

If you can get in early on a high-growth company, that stock will almost certainly provide higher long-term returns than any index can ever provide. Index investing is great for limiting volatility and diluting risk, but that strategy also limits upside potential. The Nasdaq certainly has exposure to some absolute rock stars, with Apple, Microsoft, Amazon, Tesla, Alphabet, and Facebook making up nearly 45% of the market-weighted index. However, even the greatest diversified portfolio will inevitably be slowed down by pedestrian performers and outright losers within its ranks.

Square currently bears all the hallmarks of a high-growth powerhouse. The company is averaging 40% compounding annual revenue growth over the past three years, and it's actually accelerating. Despite contending with a difficult environment in 2020, Square reported 62% revenue growth and 52% gross profit growth. CashApp surpassed 36 million customers last year, an increase of more than 12 million active users in comparison to 2019. Those are phenomenal results for growth investors. It doesn't seem that this charge is due to end soon, either. Square's small business services are especially popular with restaurants, bars, food trucks, and live events, which could catalyze sales this year when people resume these sorts of activities in larger numbers.

So far, this has translated to superior returns for Square's shareholders. The stock is up 470% over the past three years, and 221% over the past 12 months. The Nasdaq had one of the strongest 12-month periods in its history, and the stock index still fell 180 percentage points short of Square.

Stock price chart comparing 12 months of Square and the NASDAQ until February 2021

Image source: YCharts

How much risk can you tolerate?

Square's Q4 revenue was augmented to the tune of $1.7 billion by Bitcoin transactions. The company owns more than $220 million of the flagship cryptocurrency, which it allows CashApp users to purchase and hold as an investment. People who adopt disruptive fintech solutions are typically a younger demographic that's less grounded in traditional strategies, so it's a necessity to offer crypto trading on CashApp.

That said, investors should be aware of the ramifications before diving head-first into Square. Purchasing and holding cryptocurrencies will influence the revenue reported by Square, so the sales from the rendering of its core services might be substantially overstated in headline figures. Bitcoin and its peers are also likely to remain extremely volatile in the future, so that will also have a bearing on financial results.

From a stock performance perspective, Square has delivered undeniably higher returns than the Nasdaq. However, the two are highly correlated, and Square shareholders experience significantly more volatility. Square's 2.58 beta over the past three years indicates that investors will have a bumpy ride if the stock market starts moving sideways or downward. The Nasdaq might not share the same upside, but it should still deliver proportionate and directionally similar returns with more tolerable drawdowns along the way.

The choice between buying Square or the entire Nasdaq hinges on your personal situation. If you don't have a properly diversified portfolio, then I think it would be unwise to expose yourself too much to Square's performance. If you already have some balance in your portfolio, and you are just looking for a new position to responsibly increase your growth, then Square is probably a much better fit. The fintech disruptor has substantially more upside, but we don't know exactly what's going to happen with the company in the long term (or the stock's valuation in the short term).

High volatility could be a non-starter if you're risk-averse or have a short investment time horizon. For those who can stomach it, Square has outperformed the indexes, even when adjusting for volatility with metrics such as the Sharpe ratio. Know yourself before you commit either way.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.