Face Off: SPY vs. QQQ

08/09/2016 9:00 am EST

Focus: ETFs

David Fabian

Managing Partner, FMD Capital Management

The biggest, most heavily-traded ETFs offer the benefits of liquidity, low-cost, and the flexibility to be either long or short the market, explains David Fabian, money manager for FMD Capital and editor of The Flexible Growth & Income Report.

For traders, the clear favorites are the SPDR S&P 500 ETF (SPY) and PowerShares QQQ (QQQ). Both of these funds provide broad-based exposure to a wide range of stocks in a single investment vehicle.

SPY was the first exchange-traded product to be introduced back in 1993 and is still the largest US-listed ETF with over $180 billion in assets. It tracks the S&P 500 Index, which is a measure of the 500 largest stocks in the US.

Each stock within the index is market-cap weighted to give the largest share of assets to the biggest companies.

It’s easily the most heavily traded ETF in terms of overall size on a daily basis. That makes for extremely tight spreads and excellent execution for those who are seeking to trade the market quickly.

One the other hand, QQQ has created its own alluring reputation as a growth-oriented and high beta way to access the market; it tracks the NASDAQ-100 Index.

QQQ has traditionally been known as a “technology fund”, however its true makeup is much more diversified than many people realize. 

The tech sector makes up 54% of the QQQ portfolio, followed by consumer discretionary stocks at 22% and health care at 13%.

Its market-cap weighted approach places a very strong emphasis on its top holdings; the top 10 stocks account for nearly 50% of the total asset allocation.

In a 5-year lookback of total return, the race isn’t even close; QQQ has been the being the winner.

The majority of this outperformance in QQQ was garnered by overweight exposure to top internet, consumer discretionary, and biotechnology stocks. These have been some of the strongest momentum players over the last half decade.

However, it’s worth pointing out that the greater performance in QQQ also came with an associated uptick in volatility as well. 

Nearly every downturn over this time frame resulted in a sharper decline for these high momentum stocks compared to the broad-market SPY. That’s something to be noted for those who have a more muted appetite for risk.

Furthermore, QQQ has significant battle scars from its devastating losses during the tech bubble of the early 2000s. This ETF fell -83% from high to low during that fiasco. SPY only lost -47% over the same time frame.

Both ETFs offer a very easy way to access a diverse group of large-cap stocks and can be suitable as long-term investment vehicles or short-term trading tools. 

The choice between the two may simply come down to experience, stock exposure, or even risk tolerance.

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By David Fabian, Editor of The Flexible Growth & Income Report

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