Exchange-traded funds (ETFs) are essential components of profitable investment portfolios, catering to the diverse needs of all kinds of investors.
Among the available options around today, two ETFs have garnered notable attention: the Vanguard Growth Fund (VUG) and the Invesco QQQ Trust (QQQ).
Both funds, heavily weighted towards the technology sector, have witnessed impressive growth in recent times, primarily driven by the remarkable performance of major tech companies often dubbed the “Magnificent Seven.”
However, when faced with the decision of where to invest this year some investors have had difficulty choosing between the two. Factors such as expense ratios and adaptability to market fluctuations become pivotal in making an informed choice between these two ETFs.
To help this decision-making process, let’s delve deeper into the characteristics of each ETF, and how the impact they’re making in today’s market.
The benefits of ETFs
ETFs bring with them several benefits that other investments don’t have.
First up, they’re among the most reliable performers on the entire stock market, grouping together solid investment options such as tech companies. This is a departure from normal stocks which tend to be more volatile, and especially from crypto investments which have been likened to playing at an online casino due to their volatility.
Another big advantage is that they help investors diversify their portfolios.
This means if one sector or industry isn’t doing well, it won’t have a big impact on your investment because other areas may be performing better. For example, if tech stocks are down, but healthcare stocks are up, your overall investment may still be stable.
This diversification helps minimize losses and make your investment more stable over time.
QQQ
The QQQ is essentially the Nasdaq-100 index, as it tracks the 100 biggest non-financial companies on the Nasdaq stock exchange.
It has a much more even feel to it than the VUG, with less weighting on Apple and Microsoft, thanks to a recent rebalance that moved the fund toward non-tech holdings.
The rebalance has already helped the ETF grow by 48.69% over the last year, including a spurt toward the end of 2023.
But there’s one factor that investors might overlook.
The QQQ’s expense ratio is at 0.20%, five times that of VUG’s 0.4%. This may not appear to be much of a difference, but it can eat up performance in the long term, so it’s always something to consider.
VUG
The Vanguard Growth Fund is a mix of 208 stocks on the University of Chicago’s CRSP US Large Cap Growth Index.
Its large stock count covers 11 industries, including the financial sector which makes up 2.6% of Vanguard’s fund. This means you’ll get exposure to companies like Visa and Blackstone, the world’s largest private equity manager, should you invest.
The fund is also heavily skewed toward the “Magnificent Seven” tech stocks, with Apple and Microsoft making up over a quarter of it.
Despite these concerns, VUG has increased by 40.02% over the past year, including an 11.36% leap in the last six months.
An expected interest rate drop in Europe and the United States would benefit the tech sector and be a further boon for VUG investors.
Which is the best?
Predicting which of these two ETFs will perform better in 2024 is a tough task, whether you’re an experienced investor or simply working out how to start trading stocks.
Their performance is likely to come down to two key events: a drop in interest rates and a generative AI market that continues to send growth stocks soaring.
If you believe both of these events will come to pass this year, a likely scenario, then the QQQ is well-positioned to outperform the VUG thanks to its more concentrated growth stock holdings, which also include the tech sector.
That said, a recession would throw this into chaos. If you think one is on the cards, then the VUG makes more sense for bearish investors who wish to diversify their holdings, just in case.
The current market doesn’t point toward a recession; however, so, as it stands, QQQ should outperform VUG this year.
Disclaimer:
The above information is not a recommendation to invest in either ETF and you should always do your research before making any investment.
