Prediction: The Invesco QQQ Trust Beats the S&P 500 Again Over the Next 5 Years

As of this writing, the Invesco QQQ Trust (NASDAQ:QQQ) has returned 20.67% over the past year, versus 16.54% for the Vanguard S&P 500 ETF (NYSEMKT:VOO). Zoom out, and the gap isn't new. Over the past decade, QQQ has returned 20.64% annualized to the Vanguard fund's 15.44%.

My prediction is that the next five years look like more of the same -- QQQ beats the S&P 500 (SNPINDEX:^GSPC) again. But the reason isn't the track record.

The two funds' biggest holdings are nearly the same companies. The difference is how much each one holds, and what fills in the rest.

Image source: Getty Images.

Same leaders, bigger weights

QQQ tracks the Nasdaq-100, an index of the 100 largest non-financial companies listed on the Nasdaq exchange. Its 10 biggest holdings account for 47.14% of assets, versus 37.62% for the Vanguard fund, which holds more than 500 stocks against QQQ's 104.

Showing how much the two overlap, Nvidia, Apple, and Microsoft are the three biggest positions in both funds. Nvidia is about 8.2% of QQQ and about 7.6% of the Vanguard fund. Amazon, Meta Platforms, and both share classes of Alphabet sit in both top 10s.

From there, the lists split.

QQQ's next tier is more of the same group: Micron Technology at about 4.6% and Advanced Micro Devices at about 3.6%, both selling into the artificial intelligence (AI) build-out.

The Vanguard fund's top 10 also includes Broadcom at about 2.9%, a chipmaker that sits just outside QQQ's own top 10, and it rounds out the list with JPMorgan Chase and Berkshire Hathaway at about 1.5% each. Hundreds of smaller positions fill out the rest. QQQ owns no banks or insurers, since the Nasdaq-100 excludes financial companies by rule.

In other words, buying QQQ over an S&P 500 fund isn't a bet on different companies. It's the same bet, more concentrated, with the market's slower growers left out.

The earnings gap hasn't closed

Owning more of the market leaders only wins if they keep out-earning everyone else. So far, they are.

Nasdaq-100 companies grew second-quarter earnings about 75% year over year, with most results in, according to an August report from Nasdaq's global index team. That put the index on track for a 13th straight quarter of double-digit earnings growth.

To be fair, the headline rate is inflated. Alphabet reported $98 billion of other income, mostly unrealized gains on its SpaceX stake, and Amazon reported $53.4 billion tied to Anthropic. But the S&P 500's growth rate leans on the same two gains. FactSet put it at about 50%, and at 32% with those two companies excluded.

Meanwhile, the market isn't charging much extra for the faster-growing group. QQQ trades at about 29.5 times its holdings' earnings, versus about 27 times earnings for the Vanguard fund. I'd argue that premium of about 9% is the most important number in the comparison.

The Vanguard fund is cheaper to own (a 0.03% expense ratio against 0.18%), but that gap is tiny next to the return gaps above.

What would flip the result?

In July, investors started to doubt how quickly heavy AI spending would turn into profits, and the broader market briefly won.

The S&P 500 Equal Weight Index (which holds every stock at the same size) beat the Nasdaq-100 by 7.5 percentage points, its widest monthly margin since at least 2005, according to Nasdaq. The Nasdaq-100 slid 11.3% from its high before recovering.

The five-year numbers carry the same warning. QQQ is still ahead, at 14.11% annualized versus 12.85%, but the margin shrinks to about 1.3 percentage points. The stretch includes 2022's bear market, which hit the Nasdaq's biggest names far harder than the broader market.

For the S&P 500 to win the next five years, AI-driven earnings would have to disappoint for long enough that investors pay less for the whole growth group. That could happen. July previewed it, and the doubts flared again just days ago, when the CEOs of Anthropic and OpenAI called for slowing the pace of AI development. But even then, the Vanguard fund wouldn't dodge the damage. With 37.62% of its assets in mostly the same top 10 names, it may simply fall less.

Ultimately, I expect the Nasdaq-100's leaders to keep out-earning the broader market, and I don't think a 9% price-to-earnings premium overpays for that. Between these two funds, I'd own QQQ for the next five years. My prediction is it finishes ahead of the S&P 500 again, likely with deeper declines along the way.

If the earnings gap between the two groups starts closing for a few quarters in a row, I'd rethink that call. It hasn't happened yet.

JPMorgan Chase is an advertising partner of Motley Fool Money. Daniel Sparks and his clients have positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Berkshire Hathaway, Broadcom, JPMorgan Chase, Meta Platforms, Micron Technology, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.