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This ETF Is Making QQQ Irrelevant

If you want to invest in the Nasdaq 100, here's where you should be putting your money instead.

The Invesco QQQ ETF (QQQ) is currently the 5th largest ETF in the marketplace with more than $200 billion in assets. It tracks the Nasdaq 100 index, which means it's effectively become investors' ETF of choice when it comes to adding quasi-tech and/or growth exposure to a portfolio.

Given its sheer size and name recognition, it'll likely remain that way for most. But should it? For me, the answer is no. There's another ETF out there that's now a better choice than QQQ.

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The Invesco Nasdaq 100 ETF (QQQM) launched in October 2020 and is also tracking the Nasdaq 100 index. If you're doing a bit of a double-take having read that, I don't blame you and you're not misreading that. Invesco launched an ETF that competes with its own and tracks the exact same index.

It may sound confusing, but it actually makes logical sense, so let me explain.

Invesco launched QQQM with one express purpose in mind - offer a cheaper alternative to QQQ. The original QQQ comes with an expense ratio of 0.20%, but QQQM is 5 basis points cheaper, charging 0.15%.

QQQ vs. QQQM

QQQ vs. QQQM

You may be asking yourself why, if Invesco was looking for a cheaper alternative, didn't it just lower the expense ratio on QQQ instead of launching a 2nd identical fund. The answer, quite simply, is revenue.

You see, with assets of $208 billion and an expense ratio of 0.20%, Invesco is generating an annualized revenue of $416 million on QQQ. Given that all of the other largest ETFs charge less than 0.10%, that makes QQQ the biggest revenue generator in the entire ETF industry.

Invesco could cut the expense ratio on QQQ down to 0.15%, but why would it want to just voluntarily give up $100 million in annual revenue when investors are more than happy to pay 0.20%. It just doesn't make sense.

But the trend in the ETF industry continues to be towards lower and lower fees. With many of the cheapest major ETFs coming in with expense ratios of just 3 or 4 basis points, launching QQQM with a modestly lower expense ratio allows Invesco to become a little more competitive while not giving up its cash cow.

QQQ vs. QQQM

On the surface, it would appear that QQQM and its 0.15% expense ratio would be a clear better choice than QQQ and its 0.20% expense ratio since it's essentially an identical product. But expense ratio is only one fee associated with an ETF.

You also have to consider its trading fees. A 5 basis point advantage in the annual expense ratio is nice, but if it costs an extra 10 basis point spread to trade, you're actually coming out behind. Trade it frequently and you could start coming out way behind.

That's the reason why I couldn't fully endorse QQQM when I originally covered it many months ago. It was still new and had a relatively small asset, which made it costlier to trade. QQQM was the scenario that I described above where the trading costs of buying and selling still made QQQ the better choice.

But that was then. QQQM has since grown to a nearly $4 billion fund. A larger asset base means more investors trading shares. As more investors trade those shares, trading costs come way down to the point where they may almost become negligible.

That's the point where we are now. Trading costs have come down to the point where there's almost no discernible trading cost advantage any more.

Screen Shot 2022-01-10 at 2.11.00 PM

QQQ has come with almost no trading spread for a while given its monstrous size. When I originally covered QQQM, it had a trading spread in the 10-15 basis point range. With how quickly it has grown (assets have increased 10-fold in just the past year), the average spread is down to just 1 basis point. 

That puts the total cost of ownership for QQQM at 0.16% (0.15% expense ratio plus 0.01% spread) compared to 0.20% for QQQ (0.20% expense ratio plus 0.00% spread). On that basis, QQQM is the cheaper option for Nasdaq 100 index exposure.

The only situation where QQQ might still come out ahead is if you're a frequent trader. Even with a miniscule trading fee of a single basis point, that can still add up if you're doing a lot of buying and selling.

If you're a long-term buy-and-hold investor (or even an infrequent trader), I think QQQM is the better choice over QQQ. Over the long-term, a few basis points difference in fees may be splitting hairs, but why not grab the advantage if you can get it?

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