QQQ vs QQQM: Which Nasdaq 100 Index Fund is better? - Physician on FIRE (2024)

QQQ and QQM are two key Nasdaq 100 ETFs offered by Invesco today. While they are nearly identical, some key differences exist, such as expense ratio, trading volume, trading spread, price, and performance of each fund.

This post will compare QQQM and QQQ so you can make more informed decisions about which fund suits your investing goals and preferences.

What is QQQ?

Invesco QQQ ETF or QQQ is an exchange-traded fund offered by Invesco that aims to generate results similar to the Nasdaq 100. The Nasdaq 100 index tracks the top 100 stocks on the Nasdaq stock exchange, excluding any companies in the financial sector. The fund is managed to match the indexes quarterly, rebalancing and reconstituted annually.

What is QQQM?

Invesco NASDAQ-100 Index or QQQM is an exchange-stranded fund offered by Invesco that aims to generate similar results to the Nasdaq 100. QQQM is a passively managed fund that is rebalanced quarterly and reconstituted annually to ensure its performance with the index.

QQQ vs QQQM

Diversification – Tie

QQQM and QQQ use the same diversification and invest in the same index. This means that they should produce a similar portfolio and risk profile as one another.

Below, we can see the industry diversification of both QQQM and QQQ.

The table shows that QQM and QQQ have nearly the same portfolio diversification by industry and follow the Nasdaq 100 index very closely.

Another key measure of a portfolio’s diversification is the top 10 holdings of an ETF. Below, we compare the top 10 holdings for QQQM and QQQ.

The table above shows that both funds hold the exact same top 10 holdings, which are nearly identical distributions. Both QQQM and QQQ hold approximately 50% of their portfolio in the top 10 holdings.

This would mean that the other 90 holdings they have account for the other 50% of their portfolio.

Overall, QQQM and QQQ have nearly identical portfolios with the same diversification strategy.

Minimum Investment – Tie

QQQM and QQQ both have investment minimums of $1. Both funds are highly accessible to investors and available by many brokerage firms, making them easy to invest in.

Both funds are ideal for any investment level.

Expense Ratio – Advantage to QQQM

Expense ratios are important because they determine how much you will pay from your returns to the fund for operating your portfolio.

One of the few differences between these two funds is their expense ratio. The newer QQQM has a lower expense ratio by 0.05%. QQQM has an expense ratio of 0.15% compared to QQQ expense ratio of 0.20%.

QQQM is a better option if you want to pay the lowest fees possible since its expense ratio is 25% smaller than QQQ.

Trading and Liquidity – Tie

QQQ and QQQM have the same trading and liquidity characteristics since they are both ETFs.

As ETFs you can buy and sell ETFs throughout the day at any time during market hours. This is not the case with mutual funds, which are only traded at the end of the day based on Net Asset Value (NAV). This benefit of ETFs doesn’t come without drawbacks, though – given that ETFs can trade throughout the day, they typically trade at prices slightly different from their NAV. This difference is called a bid-ask spread.

ETFs offer an advantage to investors who trade daily or change positions frequently. Since they can trade throughout the day, whereas mutual funds, you have to wait until the day is closed.

It is important to note that if you plan on actively trading one of these funds, QQQ has the advantage. QQQ has more trading volume, resulting in a lower spread cost than if trading QQQM.

Tax Efficiency – Tie

When comparing two different investment options, it’s important to consider the tax implications and not only the returns they generate. The tax implications of an investment can have a huge impact on which investment generates higher after-tax returns.

Generally, ETFs will have a slight edge from a tax efficiency perspective. ETFs tend to distribute comparatively fewer capital gains to shareholders – these same gains are simply more challenging to manage efficiently from a mutual fund.

Since both QQQM and QQQ are ETFs, they offer the same tax advantages and efficiencies.

Tax Loss Harvesting – Tie

As ETFs, both QQQM and QQQ have the same rules and regulations.

Tax-loss harvesting is a strategy that involves selling investments at a loss to offset gains (and up to $3,000 in ordinary income). Tax-loss harvesting only matters in taxable investment accounts since you aren’t taxed on capital gains in tax-deferred accounts. While this strategy can be implemented using any type of investment (stocks, ETFs, mutual funds, or other property), mutual funds have an advantage because of how they are traded.

When you sell an ETF, you’ll have to wait for the funds to settle before reinvesting the proceeds. You may have to wait one or two days before you have access to the funds, commonly called T+2.

Performance & Dividends

When comparing these two funds’ performance, we should expect similar results, but one important distinction is that QQQM is a new fund. It was started in 2022, so it only has approximately two full years of performance as of November 2023. On the other hand, QQQ is a much bigger holder; it started in 1999 and has a much longer performance history than QQQM.

Since QQM is much newer, we have a limited amount of years to compare performance. Below, we can look at the annual performance of QQQ and QQQM.

The table shows that based on QQQM’s two years of performance, QQM has a slight advantage in total returns.

We can also look at the trailing returns since we have limited annual returns to compare.

Overall, QQQM and QQQ have very similar returns, with QQQM having a consistent advantage in returns. On average, QQQM has a return of 0.07% higher than QQQ.

The table above shows the dividend yield for both funds. This table shows that QQQ has a historical advantage in 2022 and 2021 with a higher dividend yield. But YTD in 2023, QQM has a slight advantage. This can be a sign that as the QQQM fund becomes more mature, it will be able to generate a dividend yield closer to or better than QQQ, similar to the annual returns performance. But currently, QQQ has an advantage in dividend yield performance.

QQQ vs QQQM: Who Should Invest?

In reality, QQQM and QQQ are nearly the same ETF options with very few similarities. They are both ETFs offered by Invesco that use the Nasdq 100 as an index and, as a result, have nearly identical portfolios and risk profiles.

So, where do they differ? The first main difference is that QQQ is one of Invesco’s oldest offerings, while QQQM is one of their newest. QQQ starred in 1999, giving it plenty of performance history, while QQQM only started in 2022, giving it only two full years of performance history.

Another key difference is the expense ratio. QQQM was introduced as a lower-cost alternative to QQQ. QQQM has an expense ratio of 0.15%, while QQQ has an expense ratio of 0.20%, saving investors nearly 25% in expenses annually when they invest.

Another important difference is their trading and liquidity.

While both ETFs have the same trading rules, the key difference is trading volume and spread cost. Since QQQ is a larger fund with a significantly higher volume, it has a lower spread cost. On the other hand, since QQQM is newer and smaller, it has a higher spread cost. Now, this is only important if you intend to trade actively, in this case, QQQ has the advantage. If you plan on holding one of these funds for the long term, QQQM is the better option with a lower expense ratio and trading volume.