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Even on this planet of index funds, where the stakes are massively lowered by inherent diversity, there’s debate as to which fund can be the more lucrative long run play.

Two which are commonly pitted against one another are QQQ and SPY. Each mega-popular ETFs have been around for many years, share much of their DNA, and have helped countless hundreds retire early with their double-digit annualized returns.

But which is healthier going into 2023? Will a bearish outlook drain the share prices of 1 before the opposite? Is one higher to purchase through the “dip”? And the way should the uncertain future for Big Tech affect where your money goes?

Let’s compare QQQ and SPY to search out out which fund is true for you.

The short version

• QQQ and SPY are each giant index funds with a combined $500 billion-plus in assets under management. Their shared DNA invites countless debates and comparisons.
• QQQ tracks the NASDAQ 100 while SPY tracks the S&P 500.
• Except for SPY featuring five times more holdings and 50% more every day trading volume, the largest difference is that QQQ is significantly more tech-focused.
• Because of this, QQQ’s performance tends to be more erratic – but higher overall – than the more diverse and “boring” SPY. Neither is inherently higher, but QQQ investing requires faith in a Big Tech rebound.

What are QQQ and SPY?

QQQ and SPY are index funds that track the NASDAQ 100 and the S&P 500, respectively.

And while which will make the pair sound totally divergent, they really share the vast majority of their holdings and mimic one another’s performance. Hence the plethora of head-to-head comparisons and debates on r/Investing over which is inherently “higher.”

I won’t pick a side, after all, but there’s data to suggest that one in every of the 2 could also be objectively higher for you. Let’s discover which.

An Intro to QQQ

• Index it tracks: NASDAQ 100 IndexTM
• Expense ratio: 0.20%
• Last quarterly dividend: $1.97/share (October, 2022)
• Dividend yield: 0.70% (as of October, 2022)

The Invesco QQQ Trust tracks the NASDAQ 100 Index, meaning it includes the 100 largest non-financial firms listed on the Nasdaq based on market cap.

But that’s just the dry, technical description. To Invesco, their breakthrough ETF provides exposure to a few of today’s most progressive firms in a single click.

The firm also isn’t shy about their prized ETFs historical performance. Since inception in 1999, QQQ has smashed the general performance of the Russell 1000 and the S&P 500 – even through the dotcom bubble and the ‘08 chaos.

Does that mean it’s the clear winner over SPY, which tracks the latter?

Before we dive into the head-to-head, let’s take a better have a look at QQQ’s holdings and sector exposure. There’s so much to love, sure, but additionally a couple of eyebrow-raisers going into 2023.

Holdings

QQQ’s top 10 holdings include:

• Apple Inc (AAPL) – 12.90%
• Microsoft Corp (MSFT) – 10.19%
• Amazon.com Inc (AMZN) – 5.35%
• Alphabet Inc Class C (GOOG) – 3.34%
• Alphabet Inc Class A (GOOGL) – 3.25%
• Tesla Inc (TSLA) – 3.20%
• NVIDIA Corp (NVDA) – 3.12%
• PepsiCo Inc (PEP) – 2.38%
• Costco Wholesale Corp (COST) – 2.21%
• Meta Platforms Inc Class A (META) – 2.13%

Should you’re recent to QQQ, you’ve probably just noticed it’s most (in)famous quirk – it’s heavy weighting towards Apple and Microsoft. The 2 alone comprise nearly 1 / 4 of all the ETF, despite QQQ aiming to capture the performance of a whole index.

That’s not inherently good or bad, but it surely actually gives QQQ some personality and leads to bouncider every day performance when Apple and Microsoft hit the headlines. More on that in a bit.

Sectors

QQQ is tech heavy. Where SPY dips its toes, QQQ dunks its head.

Tech titans Tesla, Amazon, Google, Microsoft, and Apple make up a whopping 40% of all the portfolio by their lonesome. In total, 65.44% of QQQ’s holdings fall into the IT or Communications sectors, while Health Care and Industrials fall into the only digits.

Behind IT and Communications, the third biggest allocation goes to Consumer Discretionary. To not be mistaken for Consumer Staples – which also make an appearance at half the load – Consumer Discretionary stocks are likely to rise in a healthy economy and fall in a bleak one. Living proof, they’re down roughly 30% YTD in 2022.

All of it positions QQQ to ride the wave of the general economy, quite than provide a Recession-proof hedge. But before I get ahead of myself, let’s have a look at SPY and see which one’s the higher buy.

An Intro to SPY

• Index it tracks: The S&P 500 Index
• Expense ratio: 0.0945%
• Last quarterly dividend: $1.596/share (October 2022)
• Dividend yield: 1.56% (as of October 2022)

The SPDR S&P 500 ETF Trust, James Bond’s favorite ETF, tracks the S&P 500. To many, it holds the title of the world’s first ever exchange-traded fund, launching all the best way back in January 1993 (Canadians might argue the Toronto 35 Index Participation Units beat them to the punch in ‘90).

While SPY’s origins are debatable, one fact stays irrefutable; SPY stays the most important and most-traded ETF on this planet. With $376 billion in assets, SPY dwarfs its rival QQQ’s “mere” $162 billion, and can be traded at a 50% higher frequency.

Unlike James Bond, SPY’s primary appeal comes from its diversity. The ETF’s top 10 holdings comprise just 26.41% of its total portfolio, and the ETF dips into 24 industries – excess of QQQ.

So let’s pick apart the small print and see why the 30-year-old ETF stays so dominant.

Holdings

Here’s a breakdown of SPY’s top 10 holdings:

• Apple Inc. (AAPL) – 7.11%
• Microsoft Corp. (MSFT) – 5.31%
• Amazon.com Inc. (AMZN) – 2.79%
• Tesla Inc. (TSLA) – 1.86%
• Alphabet Inc. Class A (GOOGL) – 1.74%
• Berkshire Hathaway Inc. Class B (BRK.B) – 1.63%
• UnitedHealth Group Inc (UNH) – 1.59%
• Alphabet Inc. Class C (GOOGL) – 1.56%
• Exxon Mobil Corp. (XOM) – 1.42%
• Johnson & Johnson (JNJ) – 1.40%

SPY’s top 10 holdings highlight its chief value proposition: diversity. Sure, Apple and Microsoft still take the cake, however the two titans’ combined weight represents just 12.42% of the general portfolio – roughly half their share in QQQ.

You’ll also see more sector diversity in the highest 10. Energy and Healthcare make an appearance, as does Berkshire Hathaway, which itself represents interests in Insurance, Entertainment, Finance, and more.

>>Related: Tips on how to Put money into the S&P500

Sectors

At the chance of overusing the “d” word, SPY stays probably the most diverse ETFs available on the market. IT and Communications together represent roughly a 3rd of the portfolio, while Financials, Consumer Staples and Discretionary, Energy, Materials, Utilities, even Real Estate make an appearance.

All of it lends to a boring-but-stable 10% historical annualized returns. And depending on the style of investor you might be, that is perhaps all you would like.

But now that we now have a basic understanding of QQQ and SPY, let’s pit them head-to-head to search out out which is true for you.

QQQ vs. SPY: Performance

While QQQ and SPY share a majority of their holdings, the previous’s tech-focus has led to more erratic performance in each directions, but higher returns overall.

Taking a look at the past five years, we are able to see how QQQ recovered rather more quickly from the pandemic than SPY, which higher represents the general market. But at the identical time, QQQ also fell harder because the Fed raised rates of interest.

Some would say this presents a main opportunity to “buy the dip,” and grip tightly onto QQQ before it takes off again. Granted, the tech-heavy ETF all the time has recovered – in spectacular fashion, no less – so taking a probability on QQQ over the “boring” SPY would look like a wise play with higher expected returns.

But I’m not so sure.

See, QQQ’s philosophy appears to be “Big Tech all the time goes up,” and historically, that’s been true. But in 2022, a string of scandals and erratic CEO behavior have led to Big Tech blue chips tumbling 50% to 70% YOY. Zuckerberg’s flailing metaverse investment, Musk’s vexing takeover of Twitter, and Carvana’s ignominious death spiral have led speculators to wonder:

Is the Big Tech renaissance over?

It’s a matter you’ll need to ruminate on before investing heavily in QQQ, since a bet on one is a bet on the opposite.

QQQ vs. SPY: Key Differences and Similarities

SPY has Half the Expense Ratio

Within the grand scheme, an expense ratio of 0.20% vs 0.10% won’t make an enormous dent in your bottom line. But I do know some investors who’re sticklers for lower MERs (management expense ratio) of their passively-managed ETFs, and I don’t blame them, so I believed it was price reiterating.

QQQ has More Exciting Performance

With 12.68% historical annualized returns since 2012 and comparatively regular performance, SPY is definitely the more “boring” investment of the 2.

Against this, QQQ has produced 16.77% historical annualized returns over the identical period, with more extreme peaks and troughs in between. In theory, a well-timed buy of QQQ could produce much higher returns.

But again, that’s assuming the Big Tech blue chips make a healthy rebound. It could take some time, especially as we’re facing down a bleak 2023.

SPY is Unquestionably More Diverse

SPY has 503 holdings across 24 sectors. Against this, QQQ has just 106 holdings across 7 sectors.

Moreover, SPY’s largest sector allocation is available in at “just” 25.93% in Technology. Healthcare, Financials, Consumer Discretionary, and Utilities all make up the highest five. QQQ may tout itself as “greater than only a tech fund,” however the numbers say “barely.” IT and Communications make up 65.44%, while Healthcare is available in at just 7.62%.

Each QQQ and SPY are Viable Long Term Holds

While the information may present SPY as safer and more Recession-proof, each ETFs are viable long-term holds. In spite of everything, not everyone seems to be so pessimistic about Big Tech; many still consider it’ll get better just as soon as the present CEOs end their shopping sprees and adjust to recent trade regulations.

If tech takes off again, you’ll be glad to have QQQ in your portfolio. Hindsight is 20|20, and we may thoroughly look back on the FY 2023 slump because the dip we’re glad we bought.

>>Realted: VOO vs VTI – What is the Wiser Alternative?

Which fund is sensible for you?

QQQ Is Higher for Bullish Big Tech-Buyers

Throughout the context of the greater market, QQQ is a dangerous buy. Unlike SPY, it requires more faith within the resurgence of Big Tech and offers little else to buoy share prices during a Recession (Consumer Discretionary also tumbles during a bleak market).

But inside the context of Big Tech, it’s a much safer buy than, say, handpicking 10 blue chips and calling it a day. Not only is it more convenient, it’s also cushioned – at the very least a bit – by multi-sector exposure. So if you happen to’re already bullish on Big Tech coming back by 2024, it’s a powerful buy.

SPY Is Higher for Everyone Else

On the flip side, if you happen to’re less bullish on Big Tech and easily looking for a superb inflation hedge, SPY is a greater bet. Sometimes “boring” is sweet. Heck, SPY may even rally past QQQ, given its exposure to growth sectors like Energy and Infrastructure.

At the chance of oversimplifying, QQQ is a greater technique to put money into tech while SPY is healthier for investing out there as a complete.

The Bottom Line: Why Not Each?

Should you’re still struggling to decide on, there’s nothing fallacious with buying shares of each QQQ and SPY. In spite of everything, the very best soups mix the correct amount of spice to an easy base.

For more ideas on “ingredients”, try our head-to-head comparing the legendary VOO to VTI.