The Invesco QQQ ETF (NASDAQ: QQQ) is once again making the case for why it’s one of the best-performing ETFs of the past two decades. A 19.9% return in the first half of the year, which more than doubled the Vanguard S&P 500 ETF‘s (NYSEMKT: VOO) 9.5% return, pushed its total return since inception to more than 1,580%.
By that measure, it may be easy to say that the Invesco QQQ ETF is easily a better investment than Vanguard’s index. But investment fit should never come down to historical returns. Sure, it’s nice when an ETF performs well, but it’s not as important as making sure it’s a fit and is aligned with your objectives, risk tolerance, and time horizon.
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VOO vs. QQQ: Concentration risk in both indexes
It’s easy to understand exactly why the Invesco QQQ ETF has been the better performer for years: its tech-sector concentration.
While the fund isn’t actually a tech ETF, it does have roughly 67% of its assets invested in the sector, including all of the “Magnificent Seven” and many of the winners so far from the artificial intelligence (AI) boom.
But don’t underestimate the concentration risk that exists in the S&P 500, either.
While its roughly 500 individual positions should help ensure a diversified portfolio, it’s got nearly 40% dedicated to tech and roughly the same committed to the top 10 holdings. The Vanguard S&P 500 ETF is indeed more diversified, but not by as wide a margin as you might think.
That means both are quite vulnerable to a reversal of the AI trade, an economic slowdown, or any kind of market rotation out of megacaps and tech.
VOO is better as a core portfolio holding
Because of its broader coverage of the U.S. stock market, the Vanguard S&P 500 ETF works much better as a portfolio cornerstone to build around. Although I’d argue that the Vanguard Total Stock Market ETF is the better core holding due to its inclusion of mid-caps and small-caps. Or the Invesco S&P 500 Equal Weight ETF might be preferable if you’re worried about the concentration issue.
Regardless of which ETF you choose for U.S. stock coverage, the diversified approach of these funds is preferable. Tech won’t lead the markets every year, and having an investment with a meaningful allocation across multiple sectors generally works better in the long term.
