Two popular domestic market funds go head-to-head: VTI vs. QQQ. VTI encompasses the entire stock market holding more than 3,500 companies. QQQ holds only the top 100 companies in the NASDAQ by market cap. Which of these two large funds is better? Do the top 100 NASDAQ companies outperform the market?
Over the past two decades, QQQ has vastly outperformed VTI with a compound annual growth rate (CAGR) of 11.71%. During the same timeframe, VTI ‘only’ yielded 8.36%. However, between 2002 and 2008 VTI actually performed better than QQQ. VTI has a much lower expense ratio than QQQ at 0.03% vs. 0.20%. VTI is also far more diversified than QQQ holding more than 3,500 U.S. securities.
VTI vs. QQQ – Overview
In this article, I will compare VTI and QQQ on a variety of different factors: we will look at their expense ratio, index and holdings as well as the fund composition. This includes analysis of their market cap distribution and industry exposure.
Finally, we will also examine the funds’ overall returns both annually and through a comprehensive backtest.
What’s The Difference?
| VTI | QQQ | |
| Name | Vanguard Total Stock Market ETF | Invesco QQQ |
| Index | CRSP US Total Market Index | NASDAQ-100 Index |
| Expense Ratio | 0.03% | 0.20% |
| Issuer | Vanguard | Invesco |
| Structure | ETF | ETF |
| Inception Date | 5/31/2001 | 3/10/1999 |
| AUM | $161B | $135B |
| Holdings | 3,513 | 103 |
Index/Holdings
The Vanguard Total Stock Market ETF (VTI) tracks the CRSP US Total Market Index. Essentially all publicly traded companies in the United States are included in this index and thus in VTI. VTI’s goals is to emulate and mirror the entire stock market.
The Invesco QQQ ETF is an exchange-traded fund based on the Nasdaq-100 Index. This index is comprised of the top 100 companies by market cap – both domestic and international. However, financial companies are excluded from the index. Given its specifications, QQQ can be considered a mega-cap ETF, holding only companies with revenues of several billion dollars.
Expense Ratio
When we look at the expense ratio for both funds the winner is clear: VTI. QQQ charges more than six times the fees that VTI does! On top of that, VTI is already one of the least expensive ETFs on the market and holds many more securities than QQQ.
Technically, the administrative cost of running the fund should therefore be lower for Invesco. One reason that is not the case, is that Vanguard operates at cost. This means the expense ratios of their funds will reflect the actual costs it takes to run the fund. Nothing more nothing less.
Issuer
VTI is issued by Vanguard. As alluded to above, Vanguard is one of the few asset management companies out there that does things right. Funds are operated at cost and investors become part-owners of the parent company. There are no third-party investors. For a more detailed explanation of Vanguard’s corporate structure check out this post I wrote a while back.
QQQ is issued by Invesco. Invesco is a well-respected investment company as well, however, the major difference is fact that the excessive fees charged are profits for the company and its shareholders (not the investors of the funds).
Fund Composition
As we can assume from the index VTI and QQQ follow, there will be differences in their fund composition. First, we will look at the differences in terms of market capitalization, i.e. whatÄs the distribution of small-, mid-, and large-cap companies within each fund?
Small-cap companies in VTI only make up around 6% of the fund’s total market cap. This might be surprising given that VTI includes more than 3,500 companies, but even the aggregate market share of those small-cap players does not stack up against large-cap stocks.
As a result, large-cap stocks represent by far the largest portion of VTI at 76.4%. Mid-cap companies consistently make up less than 20%.
For QQQ the picture looks even more lopsided. 97% of the fund’s market cap is made up of large-cap companies. Of course, since the index that the fund tracks only includes the 100 largest companies of the NASDAQ this distribution is hardly surprising.
Industry Exposure
Industry exposure plays a crucial role in making sure that your portfolio is not overexposed to one specific sector.
Basic materials, real estate, utilities and energy are the least represented industries in VTI. On the high-end we have technology, healthcare and financial services. These last three sectors alone make up around 50% of VTI.
QQQ’s sector exposure is even more extreme: Technology stocks alone account for close to 50% of the fund’s industries. The remainder is then basically shared between communication services (also tech) and consumer cyclical.
VTI vs. QQQ – Analysis
When assessing your portfolio risk you might want to take into consideration the following factors: volatility & drawdowns. In this section, we will look at both of these factors for VTI and QQQ.
| Metric | VTI | QQQ |
| Volatility (monthly) | 4.34% | 5.51% |
| Volatility (annualized) | 15.02% | 19.08% |
| Downside Deviation (monthly) | 2.99% | 3.58% |
| Max. Drawdown | -50.84% | -49.74% |
| US Market Correlation | 1 | 0.89 |
Volatility
QQQ is far more volatile than VTI. QQQ has an annualized volatility of 19.08%. This means that your portfolio value can vary by 20% each year! VTI, on the other hand, has a volatility of 15%. Still fairly high but more manageable.
Your risk tolerance will determine whether QQQ is even an option for your portfolio. If you’re younger and have several decades in the stock market ahead you may be more comfortable including higher-volatility funds such as QQQ.
If you are nearing retirement, adding QQQ to your investment mix might not be such a good idea. Fixed income and stable assets tend to become more important the further you progress in life.
Drawdown
Drawdowns play into the same metric of risk tolerance. The higher the fund’s volatility, the bigger the drawdowns tend to be over time.
In the above graphic we can see two interesting patterns in times of crises:
- In the financial crisis of 2008/2009 QQQ experienced a massive drawdown of close to -50% while VTI retained far more of its value.
- In the most recent COVID-induced market crash QQQ did a lot better than the entire market.
The explanation: the most recent crisis was especially hard-hitting for small businesses that relied on customer services in person. Large-tech companies like Zoom, Microsoft, and Apple were hardly affected by the lockdown measures.
VTI vs. QQQ – Performance
Finally, we’ll compare the total performance of both funds in a $10,000 portfolio backtest that ranges from 2002 up until 2020.
Annual Returns
In the annual returns, we see the above-mentioned facts reflected quite clearly: the crises of 2002 and 2008 were horrible for QQQ while the most recent one had little effect on the fund’s performance. VTI overall provided more stable and balanced returns than QQQ but far less in total.
Portfolio Growth
| Portfolio | Initial Balance | Final Balance | CAGR |
| VTI | $10,000 | $44,433 | 8.36% |
| QQQ | $10,000 | $78,353 | 11.71% |
A $10,000 investment in VTI would have yielded $44,433. That equates to a compound annual growth rate of 8.36%. The compounding effect alone over a period of almost 20 years is astounding. Simply investing $10,000 and not adding a single penny would have quadruplet your investment in less than 20 years.
A $10,000 investment in QQQ would have yielded $78,353. This equates to a CAGR of 11.71%. This makes QQQ’s returns far superior to those of VTI. In fact, even though the growth rate is just 3% higher, your balance would have been almost doubling that of VTI. The magic of compound interest!
However, this result comes with a big caveat: does it even make sense to compare funds of such diverse composition? Perhaps we should compare Invesco’s fund with a Vanguard fund in the same category. Just for your reference, I’ve added a quick portfolio backtest of QQQ and VGT (Vanguard’s Technology ETF) and the differences in performance almost become non-existent:
Given these results, would you really want to add a fund to your portfolio that charges almost 10x more than most Vanguard funds do? Your call.
Conclusion
Conclusively, VTI and QQQ are two very different funds with different objectives. VTI aims to track the entire market while QQQ aims to outperform the market by picking mega-cap tech stocks.
And this strategy has been successful for QQQ: tech stocks have greatly outperformed the total market return for the past decade and beyond.
The question is whether QQQ is really the best fund to expose yourself to the tech sector. There are certainly other funds that get the job done at much lower fees. VGT is an excellent alternative that is part of the Vanguard Group and charges far less than QQQ does.
In the end, QQQ or VGT might be a nice add-on to your portfolio. But I continue to believe that a broad market fund such as VTI is a more solid basis for a long-term portfolio.
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