Confused about different ETFs

Question

I am trying to decide what ETFs to invest in (long term) and I see many options that are recommended online, by reliable finance websites, but make no sense to me (I will mainly invest in VOO, but I would like to try others, too).

For example, many places recommend QQQ. However, QQQM has a smaller expense ratio and virtually the same growth over time (and they both have a huge number of available stocks, so liquidity shouldn't be a problem).

Why invest in QQQ at all? What am I missing?

Likewise VGT and FTEC seems to be almost identical, but the expense ratio of VGT is higher (actually FTEC even does better long term i.e. 5 years). Why would anyone ever invest in VGT over FTEC?

So my question is, I see cases where for ETFs that are highly recommended online (like QQQ and VGT) you can find an almost identical ETF (in terms of the tracked index and performance over time) but with better expense ratio.

What is the purpose of these ETFs with worse expense ratio and why are they so highly recommended? What am I missing here?

Answer 1

Invesco created QQQM because it's not making money on QQQ despite its dominance.

https://www.bloomberg.com/news/articles/2023-08-17/qqq-makes-invesco-no-money-so-it-created-a-family-of-baby-qs

Basically, they can't keep any money made from QQQ per the agreement with NASDAQ (which binds them to spending every last dime of any profit on marketing), so they created QQQM with a more efficient structure and lower fee hoping to lure new investors away. People still recommend QQQ simply because it's just so widely recognized whereas QQQM isn't as widely known.

Similarly, FTEC and VGT as you said track the same index. Notably, VGT was created almost a decade before FTEC and much bigger. The former charges a lower fee as you've seen, perhaps simply as a competitive strategy.

You're on the right track with respect to looking at the indices being tracked, comparing expense and comparing tracking performance. For buy-and-hold investors, choosing the lower-fee option among reputable sponsors is a no-brainer. For day trading and option players, the volume/liquidity aspect (via bid/ask spread) comes into play.

Answer 2

Firstly, VOO and QQQ/QQQM track different indexes - VOO tracks the S&P 500 and QQQ tracks the NASDAQ 100. So their performance will be different but one will not always be better. That might make it seem like you could diversify by investing in both, but they are very highly correlated because most, if not all, all of the top 100 NASDAQ stocks are also in the S&P 500. And since many of the largest S&P 500 companies are in the NASDAQ, they trend pretty closely.

So investing in both may not be very beneficial if you're looking for diversification (less risk) as you'll still be heavily exposed to tech stocks.

As far as QQQ/QQQM, the difference is much more subtle. Yes, QQQM has a slightly smaller expense ratio, which may seem like an obvious choice, but it also has less liquidity (is not traded as much) which means that the bid/ask spread is often higher than the much larger QQQ. If you plan to do a lot of trading, the larger bid/ask spread can mean that you pay slightly more when you buy and get slightly less when you sell, which can more than make up for the lower fee. If you plan to buy and hold, the lower fee will probably benefit you more in the long run.

Some believe that Invesco wanted to create a lower-fee ETF, but rather than just lowering the fee on the billions in assets held by QQQ they just created another Nasdaq 100 fund with a lower fee.

Another possibility is to have one fund that's marketed to institutional investors (higher fee but lower transaction costs) and another targeted to retail (lower fee but higher transaction cost).

Why would anyone ever invest in VGT over FTEC?

While their fees and performance are very similar, some may prefer the management company (or asset managers) of VGT despite the larger fee. The difference is only 0.02%, which for a $100,000 investment is only $20 per year. There may also be a liquidity difference like there is with QQQ/QQQM.