If you’re investing for the long haul and don’t want to worry about tracking individual stocks, then an index-tracking exchange-traded fund (ETF) may be a great alternative. Since you gain exposure to a large mix of stocks, you’re not dependent on how one or even a few stocks do.
The most popular index to track is the S&P 500, and that can be done through the State Street SPDR S&P 500 ETF(NYSEMKT: SPY) and other funds. It’ll give you exposure to leading U.S. stocks, providing diversification across many sectors.
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You may also want to consider having exposure to just the top stocks on the Nasdaq, with the Nasdaq-100 being a top index to track. It’ll give you access to the largest non-financial stocks on the exchange. The Invesco QQQ Trust (NASDAQ: QQQ) is a popular ETF to consider in that case.
These two indexes come with varying risks and opportunities. Which one is the better option to consider for your portfolio?
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Why the Nasdaq-100 may still be the ultimate option for growth investors
The most compelling reason to track the Nasdaq-100 is for the sheer gains you may generate in the long run. Historically, the S&P 500 has averaged annual gains of approximately 10%. But by focusing on growth stocks, you can significantly outperform the market, especially in the long term. The chart below shows how the Invesco QQQ Trust has outperformed the SPDR S&P 500 ETF over the past decade, based on their respective total returns (which include dividends).
SPY Total Return Level data by YCharts
The advantage for long-term investors is that the Nasdaq-100 is always updated to include the largest non-financial stocks on the exchange, and thus it includes the most promising growth stocks. Even if you’re unfamiliar with certain industries, you can gain exposure to the leading players by simply tracking the index, which is why it can be highly advantageous to simply buy and hold the QQQ ETF.
The S&P 500 can offer a more balanced approach to risk and growth
Tracking the S&P 500 may seem like the default option because, in many ways, it really is. Many analysts and seasoned investors simply suggest buying S&P 500 index funds. The index is known for its long-term stability and terrific diversification, making it an optimal index to follow. It won’t be as tech-focused as the Nasdaq-100 and thus can offer a bit more safety.
While this doesn’t mean that it’s an entirely risk-free investment, it may be able to shield you from more significant losses than you might experience with the Nasdaq-100. Consider 2022 as an example. That year, the stock market declined heavily due to rampant inflation. The chart below shows how much steeper the losses were by going with the more growth-focused index.
SPY vs QQQ in 2022 data by YCharts
You’ll still be able to benefit and profit from the stock market’s long-term growth with the S&P 500. Although gains may not be as high when the market is doing well, losses likely won’t be as devastating in a crash. This is why the S&P 500 is as popular as it is, because it offers a healthy balance for long-term investors.
Which index is the best option for your portfolio?
Deciding between these two indexes can be challenging, but the decision will likely come down to two factors: your willingness to take on risk, and how many investing years you have left. If your goal is to minimize risk, then the S&P 500 is the easy option. If you also don’t have many investing years left (e.g., less than five) and are approaching retirement, then the broad index may also be the better choice.
The QQQ ETF may be most appropriate for long-term investors who are OK with potentially significant fluctuations in their investments, who may not need to sell anytime soon, and who can afford to wait for a recovery.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.