Do you want to escape the Rat Race and quit your hated 9-5 job?
Do you want to enjoy your life and finally be free? If so, you need to build your stash of FU money .
To build your stash, you need to learn as soon as possible how to invest your money and where to put it, to make it work for you.
ETFs are a good investment solution.
SPY and QQQ are two of the major index fund ETFs, so today we will analyze PROs and CONs to determine which is the best for you.
SPY vs QQQ: Which ETF is better?
An ETF is a basket of securities, sold on an exchange, like individual stocks.
ETF shares are traded in the stock markets throughout the day and their prices change based on supply and demand.
Let’s make a comparison between these two major exchange-traded funds (ETF) : SPY vs QQQ .
But, first of all, an introduction about index funds.
Stock Picking: Let Warren Buffett do it.
If you are reading this blog, you are not Warren Buffet.
Stockpicking is a risky thing if you don’t know exactly what are you doing.
Index funds are better investment vehicles than individual stocks for most investors because they are one of the easiest ways to efficiently get a good diversification of your investment.
What is and index?
An index is a benchmark.
It is used to measure the performance of the stock market.
How many indexes are there?
There are nearly 3.3 million stock market indices around the world, and more or less, 5000 indexes only for the United States stock market, but the 3 most important indexes in the U.S. are the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite.
What is S&P500?
S&P 500 stands for Standard & Poor’s 500.
The Standard & Poor’s 500 is an index that include the 500 biggest companies in the U.S. Companies in the index are chosen primarily by capitalization.
Other factors are secondarily considered: liquidity, sector classification, public float, financial viability, trading history, etc.
The S&P 500 Index represents about 80% of the whole U.S. stock market value, and gives us a good indication of the entire stock market movements.
Indexes can be market-weighted or price-weighted.
The S&P 500 Index is a market-weighted index, so every company in the index is represented in proportion to its total market capitalization.
To make an example: if the value of all 500 companies of the S&P 500 increase by 15%, the value of the S&P500 index also goes up by 15%.
What is The Dow Jones Industrial Average?
The Dow Jones Industrial Average (DJIA) is one of the oldest indexes in the world.
It includes the 30 biggest companies in the United States.
This is a price-weighted index.
The DJIA today represents about only ¼ of the value of the entire U.S. stock market, and should not be used to represent sentiment of the entire market.
Actually the Dow include the U.S. biggest blue-chip companies that regularly pay consistent dividends.
So while not a good representation of the entire market, the Dow can be a great tool to select the best blue-chip dividend paying companies.
What is the Nasdaq Composite Index?
Nasdaq is the exchange for technology stocks.
The Nasdaq Composite Index represents the stocks traded on the Nasdaq stock exchange.
It is a market-capitalization-weighted index , and includes some companies that are not based in the United States.
It is a heavily tech weighted index and includes many different subsectors of the tech market including software, semiconductors, biotech, and more.
The Nasdaq Composite includes large and small firms, and also small market capitalizations so it is a good indicator of the entire technology industry performances.
What is and Index fund?
An index fund is a mutual fund or ETF (exchange-traded fund ) which own many different stocks: this portfolio of stocks is built to match the components of a market index.
Index funds is a good choice for most people.
They provide a broad market exposure, low operating fees, and a reduced portfolio turnover.
These funds will follow their benchmark index in any case, no matter of the ups and downs of the markets.
An index fund will provide broad market exposure, low operating fees, and a very low portfolio turnover.
They are an ideal core portfolio for retirement accounts, such as IRAs and 401(k) accounts.
Warren Buffett has recommended index funds for the average investor.
Better than trying to beat the market picking individual stocks, the average investor should buy an index fund that holds all of the S&P 500 companies with a low cost fee.
What is SPY?
SPDR S&P 500 ETF (SPY) is the original the first-ever exchange-traded fund listed in the United States.
one of the biggest and famous funds that tracks the Standard & Poor’s 500 Index, that includes 500 large/mid-cap U.S. stocks.
These stocks are selected by their market size, liquidity, and industry sector.
The S&P 500 is the main benchmark of the U.S. equity market and is one of the greatest indicators of the United States economy.
The top 10 holdings of the SPY are mostly high tech companies (i.e. Apple, Microsoft, and Amazon) and the technology sector represent roughly ¼ of the entire SPY ETF.
The SPDR S&P 500 ETF Trust , has a four-star Morningstar rating, and has an average annual return of about 10%.
From 1993 through February 2021, it has outperformed the category average by 1.47% thanks to its low fees.
Lower fees should continue to provide a good performance over category peers in the long run.
Source : morningstar.com
How SPY ETF is composed?
The SPY is a good diversified index fund.
It includes multiple sectors and industries: 24.19% IT, 13.82% healthcare services, 13.55% financial services, 11.18% communication services, 9.04% industrials, 7.17% consumer defensive, 10.99% consumer cyclical, 2.86% utilities, and 2.52% real estate.
SPY top 10 holdings :
|Apple Incorporated (AAPL)||6.56%|
Microsoft Corporation (MSFT)
Amazon.com Inc ( AMZN)
Facebook Inc – Class A ( FB)
Alphabet Inc A ( GOOGL)
Alphabet Inc Class C ( GOOG)
|Tesla Inc. ( TSLA)||1.58%|
Berkshire Hathaway Inc – Class B ( BRK.B)
Johnson & Johnson ( JNJ)
JPMorgan Chase & Co ( JPM)
SPY total Expense Ratio
The fund Total Expense Ratio is 0.09% yearly, which is very low.
While we can consider this total expense ratio one of the best, it is not the lowest at all.
Other ETFs track the S&P 500 Index and have lower fees .
SPY’s fees are more than the triple of the Vanguard S&P 500 ETF’s ( TER 0.03%).
Does the SPY ETF Pay a Dividend?
Yes. Its 12-month yield is about 1.55%. (Dec 2020)
Is the SPDR S&P 500 ETF a Good Investment?
Yes. The SPY ETF has a diversified exposure to almost the entire U.S. equity market.
It is suitable for investors with a mid level of risk.
What is QQQ ETF?
The Invesco QQQ ETF is another major exchange traded fund (ETF), that tracks the Nasdaq 100 Index.
QQQ: advantages and disadvantages
QQQ ETF passively follows the Nasdaq index, so the QQQ ETF prices rise and fall along with the Nasdaq 100.
Thanks to Passive management, costs are low, and investors can be rewarded with the gains of this high volatile index when it rises.
Nevertheless, investors can take the Nasdaq 100’s high losses when it falls.
QQQ includes high-tech bigs such as Apple, Amazon, Google, and Facebook.
The QQQ ETF offers low cost and huge rewards in bull markets with potential long-term growth, but on the downside, it declines more during a bear market and has a high concentration in High Tech companies, which means a very high sector risk.
Owning the QQQ ETF is a way to diversificate and get the rewards of investing in technology companies, without the risks of betting on a single high Tech company.
QQQ companies stocks are very expensive, regarding the value investing standards.
E.G. QQQ P/E ratio is of 47.48 (Sept. 30, 2020).
QQQ ETF Sectors
QQQ ETF is rebalanced quarterly and tracks various sectors: information technology , healthcare, communications services, consumer discretionary,consumer staples, industrials, etc.
|Invesco QQQ ETF Sectors|
QQQ Top Holdings
|Invesco QQQ ETF Top Holdings|
|Facebook A Shares (FB)||4.26%|
|Tesla Motors (TSLA)||3.45%|
|Alphabet A Shares (GOOGL)||3.42%|
|Alphabet C Shares (GOOG)||3.31%|
|Adobe Systems (ADBE)||2.03%|
QQQ ETF PROS & CONS
- Huge bull market rewards
- Long-term growth
- High Liquidity
- Low fees
- High risk during bear market
- high Sector risk
- High valuation levels
- No small-cap stocks
SPY VS QQQ: ETF comparison.
QQQ has a higher 5-year return than SPY (26.72% vs 17.28%).
QQQ has a higher expense ratio than SPY (0.20% vs 0.09%).
|Underlying Index||NASDAQ-100 Index||S&P 500|