SCHB vs. QQQ - Which is Best For You?
Today, we are going to explore two popular exchange-traded funds (ETFs): Schwab U.S. Broad Market ETF (SCHB) and Invesco QQQ Trust Series 1 (QQQ).
These are both prominent names in the investment world, each with its own set of strengths and weaknesses.
Key Characteristics
SCHB
SCHB is a passively managed index fund launched by Charles Schwab in 2009. It strives to replicate the performance of the Dow Jones U.S. Broad Stock Market Total Return Index. This fund encompasses a large segment of the U.S. equity universe, holding more than 2500 stocks.
QQQ
QQQ is also a passively managed index fund but was launched by Invesco much earlier, in 1999. QQQ attempts to mimic the performance of the NASDAQ-100 Index. Its holdings are largely concentrated in the technology sector, with more than 100 of the largest U.S. and international non-financial companies listed on the Nasdaq Stock Market.
Performance Comparison
Though both ETFs are designed to track underlying indexes, the composition of these indexes leads to differentiated performance.
QQQ, being heavily invested in the tech sector, has the potential to experience significant growth in a bull-market or when the tech sector is thriving. It has historically outperformed in these periods, providing investors with substantial returns.
On the other hand, SCHB, with its broad market approach, provides more balanced exposure to various sectors. During periods of strong tech growth, SCHB may underperform the tech-heavy QQQ, but it could offer less volatility during market downturns.
Dividend Comparison
SCHB has a yield of 1.45%, whereas QQQ’s yield stands at about 0.55%.
For dividend investors or those seeking regular income along with growth, SCHB might be the preferred choice. QQQ isn’t nearly as diversified, as it is best for investors seeking capital gains rather than steady income.
Expense Ratio Comparison
SCHB - 0.03%
QQQ - 0.20%
Regarding expense ratios, SCHB comes ahead with a remarkably low expense ratio of just 0.03%. In contrast, QQQ has a relatively higher expense ratio of 0.20%.
While QQQ’s ratio is low in general terms, when compared with SCHB, passive investors may see SCHB as a way to maximize returns by minimizing costs.
Risk-Adjusted Performance Comparison
When considering risk and reward, QQQ’s focus on the tech sector could lead to considerable short-term volatility. This could translate to higher potential returns but also a steeper potential fall during a tech-sector downturn.
SCHB’s diversified exposure to the broad market tends to smooth out such concentrated volatility, providing a more stable investment choice. The decision between the two will depend on each investor’s risk tolerance.
Correlation
The correlation between SCHB and QQQ generally remains high because the U.S. equity market drives both ETFs. However, variations can be noticed over specific periods due to the different weighting methodologies used and the sectors they cover.
The fluctuations in the technology sector, a major component of QQQ, could lead to more pronounced differences in performance compared to SCHB.
If you want to learn more about investing in the stock market, you can join the HaiKhuu Trading Community.
HaiKhuu offers live trading calls, daily morning reports, and an awesome community of like-minded traders to learn from.
