The Nasdaq has been the biggest driver of stock market returns for over a decade. The tech-heavy Nasdaq Composite index has produced annualized returns of more than 16% over the past 10 years, significantly outpacing the benchmark S&P 500.
There are two main indices that track the performance of the Nasdaq: the Nasdaq 100 and the Nasdaq Composite. And two great index funds that you can use to invest in these are the Invesco QQQ ETF (QQQ -0.15%) and the Fidelity Nasdaq Composite Index ETF (ONEQ), respectively.
To be sure, there are some big similarities between the two. But there are a few key differences to keep in mind before deciding which is the best Nasdaq ETF for you.
As mentioned, the Invesco QQQ ETF tracks the Nasdaq 100 index, which as the name implies, consists of 100 Nasdaq-listed stocks. Specifically, the Nasdaq 100 is composed of the 100 largest non-financial companies that are listed on the Nasdaq, so stocks such as banks are specifically excluded.
On the other hand, the Nasdaq Composite is a broad-based index that is designed to be a representative of the Nasdaq index as a whole. Not only are there more than 1,000 stocks in the Nasdaq Composite index, but it doesn't exclude any specific sector.
Both are weighted indices, meaning that larger components make up a greater proportion of the fund's assets. And as you might expect, there's a lot of overlap among the funds' top holdings. In fact, the top 10 holdings on the most recent fund literature are identical.
Before choosing any ETF, it's important to take a look at its expense ratio, which is an expression of the fund's investment fees as a percentage of its assets. Note that this isn't a fee that you have to actually pay. It will simply be reflected in the fund's performance over time.
The Invesco QQQ ETF has a 0.20% expense ratio, which means that for every $1,000 in fund assets, $2 will go toward investment fees and expenses annually. The Fidelity ETF has a slightly higher 0.21% expense ratio, but this isn't much of a difference at all. These are both low-cost ways to gain Nasdaq exposure.
Performance has been similar over the years, with a slight edge to the Invesco QQQ ETF over the longer periods. This certainly makes sense – after all, the biggest driver of stock market returns has been the big tech companies, and the Nasdaq 100 only focuses on large stocks. Here's an overview of the performance of both funds over various periods, compared with the total return of the S&P 500 index.
Time Period | Invesco QQQ ETF | Fidelity Nasdaq Composite ETF | S&P 500 Total Return |
|---|---|---|---|
1 year | 31.4% | 31.7% | 29.3% |
5 years | 166% | 137% | 111% |
10 years | 418% | 340% | 237% |
15 years | 1,240% | 916% | 627% |
Data source: yCharts. Returns through 8/27/2024.
During periods where large-cap tech stocks produce the best returns, I'd expect the Invesco QQQ to have a slight advantage on performance. But over all of these periods, it's important to note that both funds handily outperformed the S&P 500.
To be perfectly clear, I don't think investors will go wrong with either of these index funds as a long-term hold. And as we've seen, these are very similar ways to invest. I tend to gravitate toward the Fidelity ETF for the exposure to smaller Nasdaq stocks as well as the mega caps, but there's a solid argument to be made in favor of either.
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