Looking at Invesco QQQ? This ETF Is Probably a Better Bet

If you want exposure to the high-performing Nasdaq 100 index, there's no ETF that's more popular than the Invesco QQQ ETF (NASDAQ: QQQ). Hundreds of billions of dollars are invested within this fund, and it has done a good job of tracking the exemplary returns of its underlying index.

However, in gauging future performance, you have to evaluate exchange-traded funds based on more than just past history. Expenses play a key role in the way that index funds track the benchmarks they follow. Yet even though Invesco QQQ doesn't top the list by this metric, another Invesco fund with an almost identical investment objective does. In this third and final article on Invesco QQQ, the Voyager Portfolio team looks at why expenses matter and how you can make the smartest choice.

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What you pay matters

Passive ETFs tracking well-known indexes are a gold mine for fund companies. Think about it: Anybody could "manage" a Nasdaq 100-tracking ETF. Just look at the list of Nasdaq stocks, find the 100 biggest ones that aren't financial companies, and buy shares of them in proportion to their market capitalizations. That's the reason why you can find some popular index ETFs with expense ratios as low as 0.03%.

In that light, the fees that the Invesco QQQ ETF charges look fairly high at 0.18%. Interestingly, that figure is actually down from the 0.20% that the fund used to charge when it was structured as a unit investment trust. A recent shareholder vote allowed Invesco to change its corporate structure, and to pass some of the resulting savings to its fund shareholders, it lowered its expense ratio by two-hundredths of a percentage point -- a roughly 10% drop in the amount that's taken out of the fund to cover costs.

It's true that 0.18% might not seem like a lot, particularly when we're talking about a fund that has averaged 18% annual returns for 15 years running. And for small investments, it's not all that expensiv. Put $10,000 into Invesco QQQ shares, and you'll pay $18 in fees every year.

But the problem is that as your account grows, so too do your fees. When that $10,000 grows to $100,000, you'll pay $180 in annual fees. Become a millionaire, and Invesco will get $1,800. And every dollar in fees that goes to Invesco is one less dollar that's in your account, compounding and generating returns of its own.

A cheaper cousin to the Invesco QQQ

In order to dissuade competitors from taking away its grip on the Nasdaq 100 market, Invesco took steps to remedy the situation. Instead of cutting expenses on its flagship ETF, it created a new ETF with lower fees.

The Invesco Nasdaq 100 ETF (NASDAQ: QQQM) has an identical investment objective as its larger cousin. It has the same holdings as the Invesco QQQ. However, it charges an expense ratio of 0.15%. That's not too much lower than the Invesco QQQ, particularly after its latest cost cut. Nevertheless, for those who intend to invest for the long haul, even that 0.03 percentage point difference can add up to something meaningful over time.

Passing on more big-name tech

As for the Voyager Portfolio, neither Invesco QQQ nor the Invesco Nasdaq 100 ETF fit well with the goal of finding hidden stocks that will be tomorrow's winners. It's true that some of the smaller companies in the Nasdaq 100 do in fact go on to become much larger. However, because of the ETFs' weighting methodology based on market cap, the allocations to these smaller stocks are tiny.

For those who are comfortable with heightened tech exposure and risk, though, Invesco's two ETFs are worth a look. Certainly, investors who made the decision back to buy back in 2011 haven't been disappointed.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.