Picking stocks capable of outperforming the broader markets consistently is a tremendously difficult task. Scores of academic studies have proved this fact. A recent study, for example, showed that only 2.39% of stocks are responsible for literally all of the gains of the global equity markets over the past 30 years. Worse still, the same study found that one of the most common outcomes among stocks on a global basis is a 95% to 100% loss in under a decade. Ouch.
Highly similar trends have been detected by other researchers dating back to 1926, which is the beginning of the database at the Center for Research in Security Prices. This unfavorable dynamic is the core reason why super investors like Warren Buffett, George Soros, and Peter Lynch, who have dramatically outperformed the S&P 500 index over their careers, are revered on Wall Street and Main Street alike.
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Even so, non-professionals do have some remarkably attractive options to grow their capital over time. Low-cost index and exchange-traded funds (ETFs) that focus on technological innovation are prime examples. Fueled by the rapid pace of innovation in the tech sector, many of these funds have dramatically outperformed the S&P 500 over the past two decades, and this trend has been accelerating in recent times due to breakthroughs in machine learning and artificial intelligence.
While a surfeit of tech-heavy funds are available to the general public, the Invesco QQQ Trust (QQQ 1.54%) and the Vanguard Information Technology Index Fund (VGT 1.72%) are two of the most popular, and for good reason. Both funds sport relatively low expense ratios, are passively managed, and have delivered stellar returns for stakeholders since inception.
Which fund is the better buy right now? Let's compare and contrast these two popular tech-oriented funds to find out.
The case for the QQQ
The QQQ tracks the Nasdaq-100 index, which consists of the 100 largest non-financial companies listed on the Nasdaq stock exchange. The Nasdaq-100 index is heavily weighted toward technology companies. Reflecting this fact, the QQQ's top five holdings are comprised of some of the most innovative tech companies on the planet, namely Apple, Microsoft, Amazon, Nvidia, and Meta Platforms.
Even so, the QQQ is broadly diversified across several economic sectors, although the bulk of holdings are concentrated in the the technology, consumer discretionary, healthcare, telecommunications, industrials, and consumer staples sectors.
Compared to its peer group, the QQQ has a relatively low expense ratio of 0.2%, along with a fairly average yield of 0.62%. It also has a long history of outperforming several benchmarks. Over the prior 10 years, for instance, the QQQ has outperformed the S&P 500 by a staggering 186.2%. Its superb performance stems from its exposure to ultra-fast-growing tech segments such as cloud computing, e-commerce, social media, electric vehicles, and artificial intelligence.
The fund's main risk factor is the premium valuation of many of its top holdings. Wall Street expects top levels of growth from these industry titans, and any setback on this front could trigger a sell-off.
The case for the VGT
The VGT tracks the MSCI US Investable Market Information Technology 25/50 Index. The fund's portfolio consists of 318 companies engaged in various segments of the informational technology space, such as software, communications equipment, internet services, semiconductors, and IT consulting. It has an extremely low expense ratio of 0.10% and offers a yield of 0.63% at current levels. Over the prior 10 years, the VGT has outperformed the S&P 500 by 288.3%.
The VGT's impressive performance can be explained by its exposure to some of the most profitable and dominant companies in the realm of information technology. Its top five holdings currently consist of Apple, Microsoft, Nvidia, Broadcom, and Adobe. These companies have entrenched competitive positions, loyal customers, recurring revenue streams, and high-profit margins. They also benefit from secular trends such as digital payments, software-as-a-service (SaaS), cybersecurity, and cloud computing.
Like the QQQ, the VGT's largest holdings all sport premium valuations, which is an important risk factor prospective investors should bear in mind. However, the VGT has an additional risk in the form of its high concentration in the area of information technology. The QQQ isn't exactly a bastion of diversification, but it is more diversified across a wider range of sectors than the VGT.
Verdict
Both the QQQ and the VGT are excellent choices for growth investors who want to gain exposure to the high-growth tech sector without having to run the risks associated with picking individual stocks. However, some key differences between them may appeal to different types of investors. The QQQ is more broadly diversified than the VGT, but it also comes with a higher expense ratio.
So, the argument truly boils down to one of fit. If you are only going with one tech-heavy fund, the QQQ is probably the better choice because it offers a higher diversification factor. But if you plan to supplement your portfolio with other low-cost growth funds like the Vanguard Growth Index Fund, the VGT is probably the best fit due to its higher growth potential as a pure informational technology play and lower expense ratio.
