Which ETF Is Best; QQQ or SPY?

The odds seem stacked against investors looking to play a bull market trend right now. Trade tensions continue to escalate and the news of another $200 billion in Chinese tariffs hasn’t helped the situation much late in the week this week. But heading into the long weekend, there are always some last minute efforts to grab some cash for the holiday ahead.

SO WHICH FUND IS “BETTER” TO TRADE?

Well, it doesn’t really come down to which is better or worse but more so how you look at the markets. The “SPY” or S&P 500® ETF tracks the main members of the S&P 500. The “QQQ” or the Invesco QQQ tracks the Nasdaq 100 Index.

Though both are similar in nature, there are main differences to pay attention to, which could make for a clear trading strategy.

LET’S START WITH THE SPY

Like any ETF, SPY holds certain percentages of company shares that could weigh in favor of a bullish or bearish trend. Essentially if the ETF’s top holdings are seeing an uptrend, the SPY most likely will follow suit; and vice versa. Here are the top holdings and percentage of the ETF that holds them:

As we can see above, Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN) alone account for more than 10% of the ETF. The remaining members of the Top 10 (8 companies in total) account for just under 11% of the ETF.

LET’S LOOK AT QQQ

Like SPY and other ETFs, QQQ also holds certain percentages of company shares that could weigh in favor of a bullish or bearish trend. Here are the top holdings and percentage of the ETF that holds them:

Notice something interesting with the top holdings of QQQ versus the SPY? As the SPY’s top 10 holdings account for a little over 20%, just TWO companies, Apple (AAPL) and Amazon (AMZN), reach the same percentage (20%) of the QQQ. Microsoft (MSFT), Alphabet Class C (GOOG), Facebook (FB), and Alphabet Class A (GOOGL) account for another 23.71%, which means that nearly 50% of the QQQ weight is held in its top 6 holdings.

Of course these weights and shares owned changes on a daily basis but generally speaking, the SPY and QQQ have held the same companies in the top of their ranks for quite some time now.

SO WHICH IS THE BEST ETF FOR YOU?

Well, if Apple and Amazon are on fire (which they have been lately), the QQQ may offer a more consistent approach to an ETF. Because the second half of the QQQ is weighted in stocks that are a little less volatile compared to Apple and Amazon (specifically Cisco, Intel, Comcast, & Netflix) it may be a better hedged ETF when it comes to drastic drops in the high profile companies.

On the other hand, SPY could be better geared toward the higher volatility traders. Much of the weight in the top ten focuses on volatile tech and there is little weight given to Berkshire Hathaway (BRK.B) or JP Morgan (JPM), which would serve as volatility hedges in the case of SPY. The less than 2% weight can’t compete to the heavier weighted Apple, Amazon, and Microsoft that SPY holds. Essentially when tech is on fire, SPY may be your best bet.

Furthermore, because SPY tracks 500 stocks and QQQ only tracks 100, sector risk is much larger for SPY. Case and point, if IT and financials take a hit the SPY most likely will see a stronger pullback as more than 40% is solely focused on these two sectors. QQQ on the other hand is more heavily weighted in tech alone with 56% of the ETF weighted in tech. If trade issues come up that would affect banks, QQQ only holds roughly 1.2% financials

In the end, the choice is up to the individual investor whether to buy QQQ, SPY or neither of them. ETFs offer investors a way to take advantage of a basket of stocks without putting all their eggs in just one.

In general, ETFs can be expected to move up or down in value with the value of the applicable index. Although ETF shares may be bought and sold on the exchange through any brokerage account, ETF shares are not individually redeemable from the Fund. Investors may acquire ETFs and tender them for redemption through the Fund in Creation Unit Aggregations only.

Exchange-traded funds are similar to both stocks and mutual funds. Like a stock, an exchange-traded fund, or ETF, is a security listed on an exchange. You can buy some ETFs on margin, or use stop or limit orders to control the price you pay or receive. In the end, whether picking stocks or an ETF, you need to stay up to date on the sector or the stock in order to understand the underlying investment fundamentals.

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