Should You Invest in the S&P 500 or the Nasdaq-100 Right Now?
Key Points
Tracking the S&P 500 has been the default option for many long-term investors.
The Nasdaq-100, however, has delivered far superior returns in recent years.
For investors, choosing between the two options could come down to risk tolerance.
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Tracking the S&P 500 over the years has been a great move for investors. The index, which includes the leading stocks on U.S. markets, has risen by about 10% on average over the long term. There have been plenty of challenging long periods along the way, but, generally, a buy-and-hold strategy has worked well for long-term investors. A popular exchange-traded fund (ETF) that tracks the index is the SPDR S&P 500 ETF (NYSEMKT: SPY).
A more popular option for growth investors has been to track the top stocks on the Nasdaq exchange via the Nasdaq-100 index. That has yielded stronger results in recent years due to the strong performance of tech stocks, but it also carries more risk. It can be tracked through the Invesco QQQ Trust (NASDAQ: QQQ).
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Which one is the better option today: tracking the S&P 500 or the Nasdaq-100?
Image source: Getty Images.
Over the past decade, the Nasdaq-100 has vastly outperformed the S&P 500
The allure of tracking the Nasdaq-100 is that its upside can be far higher than that of the S&P 500, which holds many more stocks, but which may not be nearly as appealing to growth-oriented investors. Over the past decade, the Invesco QQQ Trust has generated a return of over 550%, which is far higher than SPY's gains of around 250% over that stretch.
As tech stocks have benefited from the growing excitement around artificial intelligence, the Nasdaq-100 has continued to be the most attractive option for generating significant returns for investors. However, there is always the looming concern that it may not be the safest option given how expensive many stocks have become these days, and the danger that returns may be far lower in the future.
Two important factors to consider that could help you make the best decision
Which option works best for you will ultimately come down to two factors: how many investing years you have left, and your willingness to take on risk.
If you don't have many years until you retire or plan to withdraw money from your investments in the near future, then the S&P 500, which is a more diversified and less volatile index, may be a better option for you. The Nasdaq-100 can experience much more volatility, and if waiting years for a recovery isn't an option, it may not be a suitable investment, regardless of how promising the growth stocks within the index may appear.
However, even if you are focused on the long term, you may still not want to invest in the Nasdaq-100 if you're not comfortable with risk and volatility. If the market crashes, highly valued stocks on the Nasdaq may incur the heaviest losses due to their inflated valuations. If you're not OK with that level of potential volatility, a more diversified option such as the S&P 500 may still be the better choice.
Only if you're willing to stay invested for the long haul and can handle the volatility that comes with top growth stocks does the Invesco QQQ Trust make for a tenable option. Otherwise, you may be better off tracking the S&P 500 through a fund such as the SPDR S&P 500 ETF.
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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.
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