QQQ Vs. QQQM: Key Differences And When To Choose These ETFs

Even experienced investors will probably hesitate when asked what the differences are between the ETFs QQQM and QQQ

Invesco QQQ Trust
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? If there was ever a question within the ETF investing landscape that merits the response “it really depends on who you are as an investor and what role this plays in your portfolio,” this is it. So let’s explore.

What Is QQQ?

QQQ is an exchange-traded fund (ETF) issued by Invesco, one of the top-tier investment management firms. Its leadership in the ETF space can be directly attributed to the launch of this now-$289 billion fund, which debuted back in 1999. It simply holds and tracks the Nasdaq 100 index, which essentially is the 100 largest stocks traded on the Nasdaq stock exchange. The Nasdaq is separate from the New York stock exchange, which dates back to the late 1700s. The Nasdaq exchange was formed in 1971, but rose to prominence during the 1990s.

Apple (AAPL), Nvdia (NVDA) and Microsoft (MSFT) top QQQ’s holdings, at 9%, 8% and 8% allocations, respectively. It should be noted that this is as “concentrated” as the stock market has ever been at the top, rivaling and perhaps exceeding the environment that QQQ entered back in 1999, when it debuted as one of the first ETFs. Broadcom (AVGO), Amazon (AMZN), Meta Platform (META) a.k.a. Facebook, and Alphabet a.k.a. Google (GOOG and GOOGL), all appear in the top 10 holdings.

What Is QQQM?

QQQM is essentially a clone of QQQ. It is from the same issuer, Invesco, and tracks the same portfolio. There’s a good reason for this, as I’ll explain below. Because it might be the single biggest determinant of which of these nearly-identical portfolios available in ETF form appeals to a particular investor. QQQM debuted in 2020 and has over $31 billion in assets.

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QQQ Vs. QQQM Fundamental Differences

Source: Invesco website.

I am old enough to remember when the Dow Jones Industrial Average was the market. For most it is now the S&P 500 index. But for others, who have seen a decade of dominance by a relatively small number of huge, iconic businesses, it’s the Nasdaq. In fact, the Nasdaq 100 index, which QQQ and QQQM aim to track, has half its assets in only 10 stocks. That means the other 90 make up 50%.

That makes it so that if investors look at past performance and stop there, one of two things will happen: the past leadership of the top QQQ holdings will continue to produce strong returns. Or, we’ll see a repeat of the 2000-2003 dot com bubble, which saw QQQ drop by 83% from its peak. Investors should be forward-looking as much as possible, which is what that era taught us.

To many investors, the choice between the two ETFs comes down to whether you are owning it as a buy and hold, or trading it and/or using options with it. The former situation favors QQQM since, as the above table shows, it should slightly outperform QQQ due to that lower expense ratio. But QQQM does not offer the flexibility that QQQ does for traders and options-oriented investors. These are not gigantic differences for many investors, but to some, it could be the difference between executing a trading strategy efficiently and effectively, and not.

Expense Ratios

QQQ and QQQM would seem to be redundant, but there is a reason they are not exactly that. QQQ has a much more liquid options market, and is the centerpiece for professional investment strategies that use it as a base to invest around. That popularity and option liquidity was not lost on Invesco, who brought QQQM to market more recently and did so with an expense ratio 0.05% less than QQQ.

Dividend Yields

QQQ and QQQM should not be confused with dividend stock investing. QQQ yields 0.56% and QQQM yields 0.66%. So if we think about it this way, it would take a 50% drop in both ETFs to even approach the present yield of the S&P 500, which yields around 1.25%. And that assumes no companies in QQQ and QQQM cut their dividends.

Liquidity And Trading Volume

The aforementioned slight but important differences between QQQ and QQQM can be seen in the difference in trading volume. QQQ trades $17 billion a day on average, while QQQM trades “only” $350 million or so. Logic would dictate that QQQM should trade more because its expense ratio is lower. But as noted above, QQQ appeals to a certain type of investor, who needs high trading volume to more fluidly manage their portfolio. They are both extremely liquid, but QQQM’s option market is quite “thin” as Wall Streeters say, as compared to the robust options market that is QQQ.

Holdings And Sector Allocation

QQQ and QQQM are the same portfolio, holdings and sector-wise. Any differences are likely too small to matter to investors other than the largest institutions, where every fraction of a fraction of a percent translates to a lot of money. These ETFs are nearly 100% invested in U.S. stocks, and the technology sector makes up about 52% of assets. This is followed by 16% in consumer services and 12% in consumer cyclical, though both of those sectors are dominated by just a few holdings within QQQ. Consumer defensive and healthcare stocks make up another 6% each. No other sector accounts for more than about 3%.

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Performance Comparison

As we would expect, QQQ and QQQM perform nearly identically, but with a slight edge to QQQM, owing to that lower expense ratio. As a reminder, I stress more than most in my industry the trap of putting too much emphasis on past performance. We are coming off a strong 2023 in both of these ETFs, where they gained about 55% each. But that followed declines of more than 32% in 2022.

A quick investment portfolio math lesson may help here. Specifically, if you started with $100 at the end of 2021 and bought QQQ or QQQM, you would have seen it drop to $68 by the end of 2022. Assuming you held on, that original $100 climbed back to about $104 by the end of 2023. That two-year experience returned less than the U.S. Treasury Bills, by about 2% in total.

Tax Efficiency

ETFs have become so popular over the past three decades in part because their structure is more tax-efficient than mutual funds. With mutual funds, any capital gains earned by the fund (by selling securities), not the individual shareholders, are distributed to all shareholders annually. ETFs don’t do that, as they have a creation/redemption system that avoid that potential for a surprise tax event.

Cost Considerations

I’ve said and written it many times, but it is well worth repeating here, given the strong recent performance of QQQ and QQQM. The biggest cost of investing is not that puny 0.05% difference in expense ratio, or even the 0.15% and 0.20% expense ratios of the two ETFs, respectively.

The biggest “cost” in investing is not taxes either. The biggest cost as I see it is incurring huge losses in down markets. That’s why I mention the dot com bubble era and QQQ’s 83% decline. QQQM was not around back then, but I can say confidently that it would have dropped by the same amount, less about 0.05%.

Investor Suitability

As with all investing, in ETFs and otherwise, buyer beware and know yourself are two golden rules. Today’s investor is pummeled with so much information, it is tempting to forget what you are investing for in the first place. It also breeds a tendency to prioritize greed over risk-management.

Bottom Line

That said, back when I was a licensed investment advisor (I sold my boutique practice in 2020 to semi-retire and focus on research, my own portfolio and investor education), I used to try to focus my clients on a simple self-evaluation. Specifically, think about how much you are investing in something, as a portion of the total investing you will do between when you first started, and when you will shift to spending mode instead of accumulation mode.

So following that logic, investors investing a relatively small amount of money they won’t use for decades do not have to obsess over the risk of a QQQ or QQQM at this stage of the long stock market cycle. But those considering making big investments in what just went up a lot (like these two ETFs) should take a vastly different approach to considering the risk and reward involved.

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