Investing

3 Reasons Why SPY May Outperform QQQ Over the Next Decade

Chris MacDonald

Published: November 5, 2024 11:25 am

Choosing where to invest your money for the long term can be a tough decision. With so many options available, it’s important to pick investments that not only have a strong track record but also align with your financial goals. Two of the most popular exchange-traded funds (ETFs) are the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the Invesco QQQ Trust (NASDAQ:QQQ). Both have delivered impressive returns over the years, capturing the growth of major companies in the U.S. stock market.

However, as we look ahead to the next decade, there are compelling reasons to believe that SPY might have an edge over QQQ. The idea that a broader basket of stocks (including tech) can outperform a tech-heavy index like the Nasdaq may be considered a generally bearish view. However, this is a view many long-term investors appear to be taking, paring back bets on higher-growth tech stocks, and adding to smaller and more defensive valuation-friendly companies on other indices. Warren Buffett comes to mind as an iconic investor that’s taken such an approach of late, building a cash pile of more than $325 billion via his Berkshire Hathaway (NYSE:BRK-B).

Here’s why I think more capital is likely to rotate out of QQQ and into funds like SPY over the coming decade.

Key Points About This Article:

• With many of the most iconic investors out there now raising boat loads of capital for what appears to be an incoming storm, many are taking notice.
• Here’s what I think these moves may mean for two major index funds in terms of capital inflows over the near to medium-term.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Lower Expense Ratio

In the world of passive investing, fees matter. Management expense ratios (MERs), or simply expense ratios, measure how much a given ETF charges investors in terms of fees for managing or rebalancing a portfolio. Obviously, long-term investors can benefit the most from having the lowest MER possible on their fund. Compounding one’s wealth over time can be greatly diminished by higher fees, so a race to the bottom has ensued where ETF managers are looking for any ways possible to cut down on expenses and pass those onto investors (and gain more capital inflows in the process).

Comparing both SPY and QQQ, it’s clear both ETFs are not necessarily near the absolute bottom of the cost spectrum, but both are relatively inexpensive. The QQQ ETF offers and expense ratio of just 20 basis points (0.2%), which is certainly not bad given the level of diversification investors receive with so many high-quality growth stocks across various industries.

However, SPY’s rock-bottom expense ratio of approximately 0.09% is hard to beat, and certainly provides long-term investors with the sort of compounding advantage many look for. For those who anticipate the broader economy may outperform the tech sector over the next decade or so, this fee differential only adds to the attractiveness of this fund on a relative basis. 

More Stable Total Returns

It’s true that QQQ has outperformed the SPY for a while now – this bull market has certainly favored companies with higher growth rates and the ability to leverage a tech-focused shift in investing in recent years. However, it’s also true that SPY has provided incredible stable market returns over a very long period of time, in contrast to the more volatile returns the tech sector has provided during various crises in the past.

In my view, investing is about maximizing an investor’s risk-adjusted total return. That includes both capital appreciation and dividends. On that front, the SPY ETF offers a much higher distribution than QQQ, though both are relatively low compared to a range of other higher-yielding dividend stocks out there.

That said, for investors who believe that dividend stocks are likely to outperform as interest rates come down (and more investors simply seek out companies with more defensive balance sheets and cash flows, which are able to pay out dividends), SPY could catch more of a bid relative to QQQ.

Over the next decade, it’s my view that a combination of this dividend differential, the very small impact of lower fees, and greater diversification could provide greater returns for investors in SPY than QQQ. We’ll see – I don’t have a crystal ball. But for now at least, given where valuations are, I’d prefer to be more diversified across companies with lower relative multiples than in sectors with the highest multiples.

Greater Economic Diversification

Investors looking for tech exposure will most likely gravitate toward QQQ, given this index’s very high weighting toward high-growth tech stocks. Indeed, over the better part of the past two decades, this strategy has certainly worked out, with QQQ vastly outperforming other major index funds like SPY.

However, for investors who believe that so much capital has flown into the tech sector that some may start to come out to diversify into other areas of the economy, the view may be to focus on more diversified ETFs as the way to go. Indeed, if we do see a broadening out of the economy, and valuations start to revert toward longer-term means, tech stocks have more to lose (and some industrials and other companies have more to gain) from capital that may flow out of mega-cap tech and into other areas of the economy.

SPY holds a much larger weighting of healthcare, financials, consumer goods, energy and other companies in its portfolio. These are the sorts of “boring” businesses many investors don’t want to focus on right now. But if and when they do become attractive as stable, defensive offerings – that’s going to be good for long-term investors who at least have some exposure to more broadly-diversified funds.

In my view, we are starting to see a rotation build among some investor portfolios away from tech and into other beaten-down areas of the economy. This is key to my thesis that it may be the case SPY outperforms QQQ over the next decade or so.

Wrapping It Up

Overall, I think the important factor investors need to consider when it comes to both of these ETFs is whether investors want to continue to hold a very heavy tilt toward growth for the next decade, or if one thinks the pendulum may be shifting (or has already shifted) toward value. If that’s the case, SPY is likely to be a better pick, and this is generally my view right now.

That said, I do think holding some percentage of QQQ in one’s portfolio makes sense, and re-sizing this position according to one’s risk profile is the way I’d think about holding such a fund. Those who haven’t held exposure to high-growth tech stocks over the past decade have likely greatly outperformed the market, and that’s probably going to be true over the very long-run. But given where valuations are right now (and how many potential headwinds there are in the market), I’m planning on playing it a bit safer than normal over the next decade. That’s just me though. You do you.