There's no doubt that over the past decade, the tech sector has been the most rewarding for investors. In fact, nine of the world's 10 most valuable companies are now tech companies, with each of them having a market cap of at least $1.4 trillion (as of Oct. 15).
There are plenty of tech stocks that make for great investments, but one of the best ways to take advantage of the tech sector's growth is by investing in a tech-focused exchange-traded fund (ETF). These ETFs provide exposure to the tech sector while minimizing the risks that come with investing in individual tech stocks.
Two tech ETFs that are popular choices are the Invesco QQQ Trust ETF (QQQ +1.67%) and the Vanguard Information Technology ETF (VGT +1.99%). Each does a good job at providing exposure to the tech sector, but if you had to choose one, which one should you select?
Image source: Getty Images.
What each ETF focuses on
QQQ is an ETF that mirrors the Nasdaq-100. The Nasdaq-100 is a subset of the Nasdaq Composite, containing the largest 100 non-financial companies trading on the Nasdaq stock exchange. Although it's not a pure-tech ETF, the tech sector makes up over 60% of the fund.
On the other hand, VGT is more of a pure-tech ETF. It contains 314 companies, all from the information technology (tech) sector. Most of the companies are large-cap companies, but there are mid-cap and small-cap tech stocks included.
The two ETFs share four companies in their top 10 holdings:
| Company | Percentage of QQQ | Percentage of VGT |
|---|---|---|
| Nvidia | 9.56% | 17.16% |
| Microsoft | 8.34% | 13.35% |
| Apple | 8.03% | 13.09% |
| Broadcom | 5.85% | 4.47% |
Data sources: Invesco and Vanguard. Invesco holdings as of Oct. 10. Vanguard holdings as of Sept. 30.
Both ETFs are weighted by market cap, which is why these megacap tech stocks account for such a large portion of the ETFs.
How each ETF has performed in the last decade
Both QQQ and VGT have had very impressive returns over the past decade, but VGT has outperformed QQQ by 616% to 468% in that span. This works out to 21.8% and 19% average annual returns, respectively.
Much of VGT's outperformance has come in the past year, particularly with the explosion in growth from Nvidia, which accounts for a large part of the ETF.
So, which ETF is the better choice for investors wanting to invest in tech?
There are a couple of things that stand out about VGT. First, its performance over the past decade compared to QQQ's. Additionally, it's cheaper than QQQ, with a 0.09% expense ratio compared to QQQ's 0.2% expense ratio. That 0.11% difference seems small on paper, but it adds up over time to a real difference in returns. If you were to invest $500 monthly into each and average 10% annual returns, you'd pay over $4,200 more in fees in 20 years with QQQ.
NASDAQ: QQQ
Key Data Points
All that said, I still lean toward QQQ being the better option because it's more diversified than VGT. I wouldn't consider either of them "diversified" in a traditional sense, but four companies -- Nvidia, Microsoft, Apple, and Broadcom -- accounting for 48% of VGT is cause for caution in my opinion.
This heavy concentration has worked out in VGT's favor, but the same thing that made it soar can also make it tumble if those companies experience a pullback (which isn't far-fetched, given their high valuations). As those companies perform, so does VGT for the most part.
QQQ is also heavily weighted in those companies, but it has other non-tech companies in its holdings that can help pick up the slack if the tech sector goes through a down period. With QQQ, you get exposure to some of the world's top tech companies, yet performance isn't solely reliant on their performance. That's a better approach for long-term investors.
