QQQ vs TQQQ: Which Nasdaq 100 ETF should you choose? - Physician on FIRE (2024)

If you are trying to decide which Nasdaq 100 ETF you should invest in, then you likely came across QQQ and TQQQ.

Both QQQ and TQQQ track the performance of a Nasdaq 100 index. But, one key distinction is that QQQ is a passively managed index fund while TQQQ is an actively managed leveraged fund that aims to generate 3x the returns of the Nasdaq 100.

But what does this mean for your investment? Which ETF should you choose?

In this post, we’ll compare JEPI and SCHDs diversification, expense ratio, and performance to help you decide which is right for you.

What is QQQ?

Invesco QQQ ETF or QQQ is an exchange-traded fund offered by Invesco that aims to generate results similar to the Nasdaq 100. The Nasdaq 100 index tracks the top 100 stocks on the Nasdaq stock exchange, excluding any companies in the financial sector. The fund is managed to match the indexes quarterly, rebalancing and reconstituted annually.

What is TQQQ?

UltraPro QQQ or TQQQ is an exchange-traded fund offered by ProShares. TQQQ is a leveraged ETF that aims to generate 3x the performance of the Nasdaq 100. TQQQ uses the Nasdaq 100 as a foundation and, along with derivatives, generates higher returns than the index.

TQQQ is an actively managed fund that uses derivatives to generate a leveraged ETF. As a result, this ETF incurs a higher risk than traditional index ETFs.

QQQ vs. TQQQ Summary

Diversification – QQQ

QQQ and TQQQ are two ETFs that invest in the same index, which is the Nasdaq 100. This means that they have the same diversification strategy. The one key difference is that TQQQ aims to generate 3x the performance of the Nasdaq 100 rather than tracking the performance of the index.

As a result, in order to generate 3x the performance of the index, there are some key investment strategies that help it achieve its goals.

Below is the portfolio breakdown by sector for QQQ and TQQQ as of February 2024. Remember that these portfolios are not fixed and will change according to each ETF’s rebalancing schedule.

The table above shows that QQQ and TQQQ have nearly the same industry portfolio composition. This is to be expected since they use the same index as a baseline.

The three primary sectors for both QQQ and TQQQ are information technology, consumer services, and consumer discretionary. Information technology is the largest industry, accounting for 51% of the portfolio.

Likewise, we can look at each fund’s top 10 holdings to see how they differ.

TQQQ is unique because it is unlike other ETFs, which mainly invest in company stocks. TQQQ is a leveraged ETF that uses financial derivatives to reach its return goals. QQQ, on the other hand, strictly invests in stocks following the Nasdaq 100 index.

From the table above, we can see the top 10 holdings within the index. However, for TQQQ, this is a bit misleading because the top 10 holdings inside the ETF are leveraged derivatives. This is why the top 10 stock holdings are at lower proportions than QQQ. Overall, QQQ’s top 10 holdings account for 46% of the portfolio, whereas TQQ’s top 10 stock holdings account for 20% of the portfolio.

Regarding diversification, QQQ has an advantage because it’s invested solely in stocks, while TQQQ has approximately 26% of its portfolio invested in derivatives. When deciding on your diversification strategy, you must decide whether you want your ETF to be leveraged or not. A leveraged ETF such as TQQQ will hold derivatives to help it reach its performance goals.

Minimum Investment – Tie

Both QQQ and TQQQ have a minimum investment of $1.00 to invest. Since these are both ETFs, they can be traded on fractional shares, allowing for even the smallest investment.

Expense Ratio – QQQ

QQQ has a clear advantage with an expense ratio of 0.20% compared to 0.86% of TQQQ.

So why is QQQ significantly cheaper than TQQQ? The key reason is that QQQ is a passively managed fund that tracks the performance of an index. TQQQ, on the other hand, is a leveraged ETF that requires active management.

Actively managed funds are more expensive due to the time and effort required to select a holding compared to a passively managed index ETF like QQQ. In particular, TQQQ is a leveraged ETF that typically has a higher expense ratio than other ETFs.

Trading and Liquidity – Tie

QQQ and TQQQ have the same trading and liquidity characteristics since they are both ETFs.

Investors can buy and sell ETFs throughout the day at any time during market hours. This is not the case with mutual funds, which are only traded at the end of the day based on Net Asset Value (NAV).

ETFs’ trading flexibility doesn’t come without drawbacks, though—they typically trade at prices slightly different from their NAV. This difference is called a bid-ask spread.

ETFs offer an advantage to investors who trade daily or change positions frequently. Since they can trade throughout the day, whereas mutual funds, you have to wait until the day is closed.

Tax Efficiency – QQQ

When comparing two different investment options, it’s essential to consider the tax implications and not only the returns they generate. The tax implications of an investment can have a significant impact on which investment generates higher after-tax returns.

Generally, ETFs will have a slight edge from a tax efficiency perspective. ETFs tend to distribute comparatively fewer capital gains to shareholders – these same gains are simply more challenging to manage efficiently from a mutual fund.

Generally, leveraged ETFs are less tax-efficient than traditional ETFs. This is because they use derivatives to achieve higher returns. In many cases, leveraged ETFs realize more short-term capital gains.

As a result, QQQ may have a slight edge in Tax efficiency compared to TQQQ.

Tax Loss Harvesting – Tie

As ETFs, both TQQQ and QQQ have the same rules and regulations.

Tax-loss harvesting is a strategy that involves selling investments at a loss to offset gains (and up to $3,000 in ordinary income). Tax-loss harvesting only matters in taxable investment accounts since you aren’t taxed on capital gains in tax-deferred accounts. While this strategy can be implemented using any type of investment (stocks, ETFs, mutual funds, or other property), mutual funds have an advantage because of how they are traded.

When you sell an ETF, you’ll have to wait for the funds to settle before reinvesting the proceeds. This wait, commonly referred to as T+2, may be one or two days before you have access to the funds.

If you prefer the tax-loss harvesting rules of a mutual fund, opting for a similar S&P-indexed mutual fund might be a better option.

Performance & Dividends – TQQQ (Returns), QQQ (Dividend Yield)

The performance of an investment option is often one of the most critical aspects investors consider. TQQQ is a leveraged ETF that aims to generate 3x the performance of the Nasdaq 100 Index. As a result, since QQQ tracks the performance of the Nasdaq 100 index, we expect TQQQ to generate higher returns than QQQ. Many would expect TQQQ to generate 3x returns, but in practice, due to leverage decay, the returns are lower.

One important thing to consider when comparing their performance is that TQQQ is significantly more risky than QQQ because it is leveraged.

The table below shows the total annual returns between QQQ and TQQQ.

From the table above, you can see that, as you would expect, TQQQ generated higher returns than QQQ. One important thing to note is that in those years when Nasdaq 100 generated negative returns, TQQQ had higher negative returns compared to QQQ. This is due to the volatility of derivatives; while they generate higher positive returns, they also generate higher negative returns.

Another key point is that in the years with positive returns since 2014, on average, TQQQ generated an annual return that was 2.8x higher than QQQ.

As expected in terms of annual returns, TQQQ has an advantage. With that said, in years of negative index performance, you can expect TQQ to perform significantly worse than QQQ. It is important to consider whether the additional risk of a leveraged ETF is worth the additional returns.

The table below will show the dividend yield for both ETFs.

The table shows that while TQQQ has a clear advantage in annual returns, that is not the case in terms of dividend yield or income generation. In fact, QQQ outperformed TQQQ in every year since 2014 except 2023. On average, from 2022 to 2014, QQQ outperformed TQQQ by 0.84%.

Overall, it’s clear that QQQ has an advantage in dividend yield compared to TQQQ. If dividend payments and monthly income generation are more important than higher returns, then QQQ is a better option than TQQQ.

year since its inception, JEPI has outperformed SCHD by an average of 5.53%. While the performance history is limited, JEPI has consistently had a dividend yield of 7% or higher, whereas SCHD has never had a dividend higher than 4%.

Since JEPI is a relatively new ETF, many have questioned whether it can maintain these high dividend yields. Since JEPI is an actively managed fund, while dividend yield may come down over time, it’s likely to perform higher than SCHD.

QQQ vs TQQQ: Where Should You Invest?

QQQ and TQQQ are two ETFs that track the performance of the Nasdaq 100 Index. The key difference between these two ETFs is that TQQQ is a leveraged ETF that aims to generate 3x returns of the Nasdaq 100.

Since TQQQ is a leveraged ETF, some key differences accompany it. First, leveraged ETFs have higher expense ratios due to the amount of effort and trading strategies required to achieve the 3x returns. QQQ only has an expense ratio of 0.20%, while TQQ has an expense ratio of 0.86%.

TQQQ is also more risky than QQQ because of the leverage and derivatives it must trade in order to achieve the ETF’s goals of a 3x return.

Regarding diversification, QQQ has an advantage because it invests in the stocks within the Nasdaq 100 index only. On the other hand, TQQQ invests approximately 26% of the portfolio into derivatives to help it achieve its 3x performance. As a result, rather than investing in stocks, TQQQ invests in high-risk derivatives.

TQQQ has a clear advantage when it comes to returns. On average, in positive years, TQQQ outperformed QQQ by an average of 61% since 2014. But with that in mind, in years of negative performance by Nasdaq 100, TQQQ underperformed QQQ by 33%. If you are willing to incur the additional risk associated with TQQQ for increased rewards, then TQQQ is a good option. However, if you prefer to minimize your risk while maintaining returns, then QQQ is a better option.

Finally, if you also want to generate some dividend income, then QQQ is a better option. QQQ has consistently outperformed TQQQ in dividend yield by an average of 0.84% from 2014 to 2022. In fact, since 2014, TQQQ has generated nearly no dividends outside of 2023, when it outperformed QQQ.

Overall, QQQ has a lower expense ratio, less risk, and a higher dividend yield compared to TQQQ. TQQQ generates higher returns with higher risk but offers few benefits elsewhere.