The Vanguard S&P 500 ETF (VOO -0.16%) is one of the simplest and best ways to build a long-term portfolio. But what if you want to give it some more growth?
Adding the Invesco NASDAQ 100 ETF (QQQM -0.60%) seems like an obvious solution. It gives investors exposure to a lot of the U.S. economy's biggest tech and growth companies. And it's delivered tremendous returns over the past several years. There's just one problem: If you already own the S&P 500, you already own most of those companies in fairly sizable allocations.
That doesn't necessarily mean you should eliminate QQQM from consideration. But it does mean you're making a bigger bet on a single sector than you might realize.
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You already own many of QQQM's biggest stocks
The Vanguard S&P 500 ETF and Invesco NASDAQ 100 ETF track two unique indexes. But when you look more closely at their compositions, you'll see many similarities.
Seven stocks -- Nvidia, Apple, Microsoft, Broadcom, Amazon, and both of Alphabet's share classes -- are in the top 10 of both funds. They account for roughly 33% of the S&P 500 and 34% of the Nasdaq-100. Overall, there's a 53% overlap. Combining these two ETFs doesn't really give you a dramatically more diversified portfolio, or much of a different portfolio at all.
NYSEMKT: VOO
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You're making a bigger bet than you might realize
The Vanguard S&P 500 ETF currently holds around 36% of its assets in the tech sector. The Invesco NASDAQ 100 ETF has roughly 66% in tech and another 17% in consumer discretionary names like Amazon and Tesla.
If you create a portfolio with a 50/50 split between these two ETFs, you've got about half of your money committed to one sector. That can be a big advantage when those companies are leading as they have been over the past few years. But it poses a significant risk when market leadership changes.
Adding QQQM to VOO provides an understandable growth tilt. But it can significantly alter your risk profile in a concentrated way, even if both ETFs individually look diversified.
NASDAQ: QQQM
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Would I own VOO and QQQM together?
Yes, but in moderation. The S&P 500 is already historically top-heavy, both in terms of tech exposure and the top 10 holdings. Adding the Nasdaq-100 to it mostly makes those concentration problems worse.
But that may be what you want if you're investing heavily in the artificial intelligence (AI) trade. It would have worked well over the past few years and could continue to do so if these companies are leading. But it's a risky bet. And one you should be aware of at all times.
