Is This ETF Making QQQ Irrelevant?

QQQ is one of the ETF industry's giant, but now there may be a better choice for targeting the Nasdaq 100.
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For investors looking to add tech and/or growth exposure to their portfolios, the Invesco QQQ ETF (QQQ) is often the fund of choice. Never mind that it's only about 2/3 composed of tech and communication services stocks, it's so top-heavy in names, such as Apple (AAPL), Microsoft (MSFT), Facebook (FB) and Alphabet (GOOG) that investors are more than happy to use it as a quasi-tech ETF.

QQQ has more than $150 billion invested in it, is currently the 5th largest ETF in the marketplace and is the 2nd most actively traded with roughly $14 billion in shares changing hands daily. To say that QQQ has been a success, especially for a non-big 3 issuer like Invesco, would be an understatement.

But QQQ isn't the only player in this space. In fact, it may not even be the best one. QQQ has competition. From itself.

Invesco Nasdaq 100 ETF (QQQM)

There might be a bit to unpack here, so let's explain. QQQ was launched way back in 1999 and tracks the Nasdaq 100 index. In October of last year, Invesco decided to launch the Invesco Nasdaq 100 ETF (QQQM), which tracks the same Nasdaq 100 index. In virtually every way, it's identical to QQQ with one exception, the expense ratio.

QQQ charges 0.20% annually, while QQQM comes in slightly lower at 0.15%.

Why launch an identical fund with a lower fee? The industry is obviously in the middle of a low fee war and ultra-cheap funds tend to get more attention. QQQM's 0.15% expense ratio won't be nearly as cheap as the lowest fee options from the likes of Vanguard and BlackRock, but it does offer cheaper exposure to the Nasdaq 100 than what QQQ does.

QQQ vs. QQQM

In a vacuum, I prefer ETFs with lower expense ratios, but there are a lot of things to factor in when deciding if one fund is better than the other.

If you're comparing two funds directly, you need to consider the total cost of ownership. That would include not just the expense ratio but also the trading spread. The spread is the cost of buying and selling shares. Generally speaking, funds that are larger and have a greater level of assets under management have lower spread costs. That's because there is a large number of traders out there and that makes it easier to get the best cost on a trade. Smaller ETFs have fewer traders making it more difficult to find a buyer or seller on the other side of the trade. Less supply means cost goes up.

So, let's start by looking at the expense ratios one more time.

QQQ vs. QQQM Expense Ratios

QQQ vs. QQQM Expense Ratios

QQQM has a 0.05% advantage in terms of expense ratio, but if that's offset by excessive trading costs, it might not be worth it. If we look at the average spread of the two ETFs, the difference is actually pretty small despite QQQM being less than a year old.

QQQ vs. QQQM Spreads

QQQ vs. QQQM Spreads

QQQM has just short of $900 million in assets under management, which is usually a good level where spread costs start coming way down. QQQ has virtually no spread, which isn't surprising given how heavily it's traded, but QQQM's spread has dipped all the way down to just 3 basis points.

If QQQ's total cost of ownership is 0.20% and QQQM's total cost of ownership is 0.18% (0.15% expense ratio plus 0.03% spread), QQQM actually appears to be the most cost-effective option. Granted, we're talking a difference of just 0.02%, so it won't be a huge financial advantage, but if the two ETFs offer the exact same portfolio, you might as well grab the cheaper option.

It's important to remember, however, that spreads can change over time, so QQQM may not always have the lower cost of ownership. QQQM's spread has generally hung out in the 0.03% to 0.04% range, but it has spiked to 0.07% in more volatile times.

QQQM Spread History

QQQM Spread History

Once a fund, such as QQQM, approaches the size it is currently, spreads tend to stabilize and I'd expect its spread to stay well below the 0.05% breakeven point in the vast majority of situations.

Conclusion

If you're looking to invest in the Nasdaq 100, I see no reason why investors shouldn't choose QQQM over QQQ. Total cost of ownership will likely be lower in virtually all situations and, while the cost savings will be minimal unless you're really making a big investment, it makes sense to grab the cheaper choice if it's available.

Keep an eye on spreads in volatile time though. We saw during the COVID bear market that many funds saw their spreads shoot through the roof, so there could be times when QQQ is still more advantageous. In most market conditions, however, QQQM now looks like the better choice.

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