If you’ve ever considered buying what the market thought was the “best” tech ETF, one usually gets mentioned first more than any other: the Invesco QQQ ETF (QQQ). It’s currently the fifth-largest ETF in the world, with assets of more than $400 billion.
But does “biggest” mean “best” in this case? No, it doesn’t.
In fact, one could argue that not only is QQQ not a great ETF for tech exposure, it’s not even a good one.
Several other ETFs beat QQQ on two major factors. One of these rivals might even earn the title of best tech ETF in the industry.
The myth of QQQ as a pure tech play
A lot of investors have the impression that QQQ is a tech ETF because it has all of the Magnificent 7 stocks, plus other sector big names including Broadcom and Netflix.
On the surface, that gives it the look of a tech ETF. But look at the investment objective of QQQ, and you’ll see why this is by luck more than anything.
The Nasdaq 100, which QQQ tracks, is designed to measure the performance of 100 of the largest Nasdaq-listed non-financial companies.
That’s right — there are no investment-related criteria at all. Qualifying stocks simply need to be listed on the Nasdaq exchange and not be a financial company. Nothing more.
Related: QQQ vs. QQQM vs. QQQJ: Present tech vs. future innovation
“The rules underpinning the construction of the Nasdaq 100 Index, which this fund tracks, are borne out of Nasdaq’s desire to promote its exchange — not investment rationale,” Ryan Jackson writes for Morningstar.
“The benchmark plucks the 100 largest non-financial firms listed on the Nasdaq and weights them by market cap. It automatically excludes stocks listed elsewhere, which shrinks the fund’s opportunity set for no economic reason.”
If you’re going to add an investment to your portfolio, it should be added for a good reason. Selecting companies based on what exchange they trade on does no real targeting and just doesn’t make a lot of sense, especially in a marketplace of more than 4,500 different ETFs that allow you to invest in almost every theme, region, factor, or niche you can imagine.
Why VGT offers true tech exposure
The better option is the Vanguard Information Technology ETF (VGT). It tracks the MSCI US IMI 25/50 Information Technology index, which invests in virtually all companies categorized as tech by the Global Industry Classification Standard (GICS).
That means you’re getting true tech exposure with VGT versus the “mostly” tech exposure you’d get with QQQ. Here are some of the biggest stocks that VGT owns that you won’t find anywhere in QQQ simply because of where they’re listed.
Major VGT-owned stocks:
- Salesforce
- ServiceNow
- IBM
- AMD
- Oracle
- Arista Networks
- Accenture
These companies aren’t necessarily the same size as Apple, Microsoft, or NVIDIA, but they’re still major players in the sector. If you want to invest in tech, these stocks belong in the portfolio.
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VGT’s other advantages over QQQ as a tech investment:
- Cost: VGT has an expense ratio of 0.09%. QQQ is more than double that at 0.20%.
- Tech exposure: Despite its reputation as a tech fund, QQQ only has about 65% tech sector exposure. VGT has 100%.
- Large-cap vs. mid/small-cap: While both funds are cap-weighted, VGT’s more inclusive criteria means that it has broader exposure to all size companies. QQQ is much more heavily tilted to just large-caps.
- 100 names vs. 300+ names: VGT is more broadly diversified, which helps mitigate some volatility and spread out risk.
Quite simply, VGT does a better job of providing more comprehensive coverage of the tech sector and does it cheaper, too.
Performance doesn’t lie: VGT has led for a decade
When it comes down to it, what investors really care about is performance. Different ETFs with seemingly similar exposures aren’t necessarily interchangeable.
VGT demonstrates that with its performance over the past decade.
|
Time Period |
VGT |
QQQ |
|
YTD |
25.0% |
21.6% |
|
1-Year |
32.8% |
28.1% |
|
3-Year |
36.5% |
33.6% |
|
5-Year |
20.5% |
17.4% |
|
10-Year |
22.5% |
19.2% |
A big factor in VGT’s strong track record is its exposure to the largest Mag 7 companies. It has a larger total allocation to the trio of Apple, Microsoft, and Nvidia (43% in VGT vs. 27% in QQQ).
Given that these stocks have delivered huge returns over the past several years, that overweight has helped propel VGT to become one of the best performers among not just tech ETFs, but all ETFs.
Key takeaways on QQQ vs. VGT:
- TheQQQ ETF is not the best way to invest in tech stocks.
- It has only 65% of its portfolio invested in tech stocks and concentrates mostly on large-caps.
- VGT provides comprehensive pure play exposure to the sector and is a better choice than QQQ for tech investing.
- VGT has outperformed QQQ in every time period over the past 10+ years.
Your mileage may vary when it comes to overconcentration at the top of a portfolio. Most people don’t care as long as it’s working, but it won’t work forever.
If one of those stocks starts to pull back, it could damage the performance of VGT. That’s a risk investors need to watch.
QQQ is fine, but VGT is better for tech investors
If the goal of tech investing is to capture concentrated exposure to all themes and companies of all sizes, QQQ isn’t the best solution.
Pure tech ETFs, such as VGT, do a better job of delivering it, and often do so at a lower cost. It offers exposure to hardware, software, semiconductors, cloud computing, and AI. Plus, VGT doesn’t water things down by including non-tech stocks the way QQQ does.
Tech is likely to remain a strong long-term play. And VGT is the way to play it.
