The Invesco QQQ Trust (ticker: QQQ) is the second-most-traded exchange-traded fund in the U.S., behind only State Street’s immensely popular SPDR S&P 500 ETF Trust (SPY). When most investors think about mirroring the Nasdaq-100 Index, they gravitate toward QQQ.
Invesco introduced a new Nasdaq-100 ETF in 2020, which trades under the ticker symbol QQQM. This fund also gives exposure to the Nasdaq-100, and it has nearly identical year-to-date and one-year returns as the famed QQQ ETF.
[Sign up for stock news with our Invested newsletter.]
Ultimately, the funds you put into QQQ can’t simultaneously go into QQQM. So, what makes these funds different from each other? It’s easier to start with how they are the same. Here’s what you need to know about how QQQ compares to QQQM:
— QQQ vs. QQQM: The similarities.
— QQQ vs. QQQM: The differences.
— Who should buy QQQM?
— Who should buy QQQ?
— Should long-term investors sell QQQ and buy QQQM instead?
— What to consider before buying a Nasdaq-100 ETF.
QQQ vs. QQQM: The Similarities
Both funds track the Nasdaq-100 Index, which gives investors exposure to the 100 largest non-financial companies listed on the Nasdaq. It’s no surprise to see the Magnificent Seven stocks dominating the top 10 holdings of each fund, but the allocation is nearly identical as of Nov. 26.
QQQ’s top three holdings are Apple Inc. (AAPL) (8.75%), Nvidia Corp. (NVDA) (8.13%) and Microsoft Corp. (MSFT) (7.7%).
Meanwhile, the top three holdings for QQQM are Apple (8.69%), Nvidia (8.17%) and Microsoft (7.74%). Percent allocations are nearly identical across the board. Furthermore, each ETF rebalances its positions quarterly and reconstitutes them annually.
QQQ and QQQM spread their capital across the same sectors and have nearly the same amount of exposure to each one. Both funds give you outsized exposure to the tech sector. Any differences are just as negligible as the percentage difference for each of the fund’s top three holdings.
QQQ and QQQM both offer an opportunity to outperform the S&P 500. While their returns are surprisingly similar year to date, QQQM has gained an annualized 10.6% over the past three years, and QQQ has gained an annualized 10.5% with a nearly identical portfolio, mostly due to its slightly higher fees.
QQQ vs. QQQM: The Differences
While it’s easier to spot similarities than differences in the beginning, it’s possible to see a few differences if you take a closer look.
The first main difference is the expense ratio. QQQ has a 0.2% expense ratio, while QQQM has a lower fee level of 0.15%. In other words, you’re giving up less of your gains with QQQM.
QQQM’s lower expense ratio is notable, especially because it doesn’t have as many assets as QQQ.
The original Nasdaq-100 ETF has $320.5 billion in total assets, compared with QQQM’s $37.8 billion. Normally, ETFs with more assets under management have lower expense ratios because they can spread the costs across more capital.
QQQM also has a 30-day SEC yield of 0.62% and a 12-month yield of 0.64%, which are higher than QQQ’s 0.55% SEC yield and 0.6% 12-month yield. A higher yield and a lower expense ratio may make QQQM feel like the obvious choice, but there are additional factors to consider.
As the second-largest ETF, QQQ enjoys incredible trading volume and liquidity. Spreads are more favorable for QQQ than they are for QQQM, and asking prices for QQQ will be closer to the market price than for QQQM.
Higher volume and better spreads make QQQ the better choice for traders, especially options traders. QQQ has daily options available, giving traders more flexibility with how they set up their strategies.
Options traders don’t have as much flexibility with QQQM options, which aren’t always available each month. On Nov. 19, traders could only choose from five QQQM options, with the earliest expiration on Dec. 20, 2024, and the furthest expiration date on Oct. 17, 2025.
QQQM doesn’t make as much sense for options traders since QQQ and QQQM will have nearly identical movements in the near term, including one-day, five-day and one-month periods.
Who Should Buy QQQM?
QQQM is more suitable for long-term investors who have no plans to sell their shares. QQQM has a lower expense ratio and a higher 30-day SEC yield, allowing you to earn more money by choosing this Nasdaq-100 ETF.
Yes, you will have to pay a bit more to buy shares thanks to the spread. However, the extra expense is minimal, and you will make it back quickly with a lower expense ratio and a higher yield. While the higher spread only impacts your trade once, the expense ratio and yield give QQQM investors an edge for years to come.
[READ: Bullish vs. Bearish: What’s the Difference?]
Who Should Buy QQQ?
QQQ is more suitable for day traders who want lower spreads and higher liquidity. QQQ also blows QQQM away with the amount of options contracts that are available. QQQ allows for more complex strategies since you can trade options that expire any day of the work week, excluding days when the stock market is closed.
While QQQM produces a slight long-term edge over QQQ, this edge doesn’t matter much for day traders. Lower spreads, options versatility and high liquidity are more valuable for this group.
Should Long-Term Investors Sell QQQ and Buy QQQM Instead?
Long-term investors have been pouring their money into QQQ for many years. The widely known ETF was launched in 1999 and has facilitated a sizable nest egg for some investors.
You’re missing out on some additional gains if you have QQQ instead of QQQM. However, most investors with QQQ should continue to ride it out. That’s because selling QQQ will trigger capital gains taxes. While long-term investors get to enjoy lower capital gains tax rates, it’s still going to hurt your total returns.
If you have QQQ stock at a loss, you can sell shares to realize the net loss and then move the funds into QQQM. Moving funds from QQQ to QQQM gives you exposure to the same benchmark without resulting in a wash sale.
What to Consider Before Buying a Nasdaq-100 ETF
Investing in a Nasdaq-100 ETF has been a great choice for recent investors. QQQ has generated an annualized 18.2% return over the past decade. Returns have accelerated in recent years, based on an annualized 21.3% return over the past five years.
However, past returns do not guarantee future outcomes, and it’s important to review any ETF’s holdings before making a decision. QQQ and QQQM both offer investors outsized exposure to the tech sector. Furthermore, they prioritize corporate giants instead of opting for small- and mid-cap stocks.
Large-cap stocks are typically more stable and are household names. While small- and mid-cap stocks can outperform large-cap stocks, those investments are more risky and require additional research.
If you buy QQQ or QQQM, you will have to monitor the Magnificent Seven stocks: Apple, Nvidia, Microsoft, Alphabet Inc. (GOOG, GOOGL), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META) and Tesla Inc. (TSLA). These stocks make up a high percentage of QQQ and QQQM. They have a history of outperforming the stock market, but if these stocks fall, Nasdaq-100 ETFs will have a hard time generating meaningful gains for long-term investors.
These ETFs also tend to get hit the hardest when the economy slows down. For instance, QQQ dropped by 32.6% in 2022, which was much worse than the 18.2% drop SPY registered in the same year. (QQQM fell 32.5%.) QQQ and QQQM have more exposure to the Magnificent Seven stocks than SPY, and the Nasdaq-100 ETFs also don’t have exposure to financial stocks.
Investors should assess their financial goals and risk tolerances before deciding if QQQ, QQQM or any another ETF is right for them.
More from U.S. News
The 5 Best 5-Star Stocks to Invest In
7 Best Cryptocurrency Mining Stocks
8 Best Consumer Staples Stocks to Buy Now
QQQ vs. QQQM: What?s the Difference? originally appeared on usnews.com
null: null
