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You've probably heard of the ETFs SPY and QQQ, as they're among the largest ETFs in the market based on their assets under management and the amount of shares that are traded daily. But just because they are more widely known, it doesn't mean that they're the best choice. And in fact, for some, there's a super easy fix that you could do that could easily end up saving you thousands of dollars down the road.
Knowing that before we get started, my name is Danny Sully and all I ask is if you do find value in this video that you consider hitting the like and subscribe button for future content like this. With that said, let's first go over what are SPY and QQQ. Now, whether you currently own or have invested into SPY or QQQ, you probably know someone that has or you've even seen other articles or posts online or even commercials about the Invesco QQQ.
But to simply understand each, first realize that both of these investments are exchangeraded funds known as ETFs, which pretty much means that they allow you to get instant exposure to many different companies all within one purchase. Now, ETFs in not that long of time just recently came into the market with the first one being launched in 1993.
That was in fact SPY that tracks the S&P 500 and is considered the most traded ETF. But realize that ETFs have been growing at an incredible rate where there are many different types and investors just continue to dive more and more into them. So knowing that to sum up the benefits of investing in ETFs, first understand that they trade just like ordinary stocks.
So they're very easy to buy and sell, making them very liquid investments. They also offer great diversification by holding many investments within one single purchase, which also helps reduce the downside risk, especially when compared to buying individual stocks. And not just that, but compared to mutual funds, ETFs are generally more taxefficient due to their structure.
And with the right ones, they have helped many investors to build significant wealth over time. Knowing that, let's now go over a quick overview to each ETF so that you can better understand what you're even getting into. To start with spy, this ETF is provided through stage street where you can see it is the original S&P 500 ETF where investors can gain costefficient high liquid exposure to 500 of the largest publicly traded US-based companies via the S&P 500 index.
And so currently SPY is considered the world's most traded ETF, trading 57 million shares a day on average, giving investors extreme liquidity. Now realize when you buy spy you are getting access to many of the country's largest companies such as Nvidia at 8% then Apple Microsoft and many more that you've probably heard of which because of that the top sector in the fund is information technology at 35% then financials and consumer discretionary thereafter not to mention but the fund currently has a 0.945% expense ratio which is the cost it takes to own the fund per year and understand that that amount is automatically taken out of your investment over time.
It's not something that you're going to have to pay separately. Besides that, over the past 10 years, SPY has grown at a rate of 15.15% per year, which includes the expense ratio factored into it and is why SPY has been known to help many investors build wealth if they've held on to it through volatile periods.
So, of course, SPY is a very qualified ETF to consider that easily allows you to trade the top 500 companies in the US. But now, let's go over QQQ. Now, QQQ was marketed to have outperformed the S&P 500 by over 500% since its initial launching in 1999. And realize that instead of spy tracking the S&P 500, QQQ tracks the NASDAQ 100, which gives you access to the performance of the 100 largest non-financial companies listed on the NASDAQ.
And some of the top holdings also consist of Nvidia, Apple, and Microsoft. but now with even more weightings towards them than the ones from SPY where you can see the top 10 make up roughly 53% of the entire portfolio and that the technology sector makes up a significant amount of the fund's exposure as well.
But one of the biggest reasons for creating this entire video is the cost of owning each and for QQQ it currently has an expense ratio of2%. And so because of that, this now leads me into discussing the hidden alternatives that are SPYM and QQQM. You see, both SPY and QQQ have their popularity because they're super liquid.
They track strong indexes, and they've built a name around themselves, giving investors credibility and trust to owning them. But what many don't realize is that the exact same providers offer cheaper alternatives. And depending on how you invest, that could very well be worth a few minutes of watching this video.
Now, remember how SPY had a 0.0945% expense ratio? The nice thing to know here is that for SPYM, which by the way, if you've never heard of SPYM, realize that just recently they changed their ticker symbol from SPLG to SPYM where you can also see that for this fund it has a lower expense ratio of 0.02%.
Now, you're probably thinking that this is a different investment or that there's some sort of catch, but the reality is they both track the exact same indexes where SPYM is known as the State Street Spider Portfolio S&P 500 ETF that tracks the performance of the S&P 500 index. And if you read through the article we posted on the site, which I'll also leave that linked in the description below, you can see that the exposure to the top 10 holdings are all pretty much the exact same, as well as the amounts of each of the top sectors in the fund.
Now, before I explain the differences and when to use each, if we look at QQQ with its 2% expense ratio, QQQM, that also tracks the exact same index, the NASDAQ 100, this fund is considered the cheaper alternative where it has a 0.15% expense ratio. And since QQQ was just recently created in 2020, if we look at its 1 and three-year historical average so far, you can see that it is shown to return slightly higher numbers for investors who own QQQM rather than QQQ throughout the entire period, which you can also see the exposure to the top 10 holdings are all pretty much the same, as well as the amount of exposure to the top sectors.
Now, another thing that's interesting to point out is that SPY and QQQ aren't the only ones to have cheaper alternatives. The same concept applies for another ETF you may also have heard of that is GLD designed to track the price of gold where you can see the expense ratio is4% but the cheaper alternative here is GLDM that has a.1% expense ratio.
So knowing all this, notice a few key areas here on how SPY, QQQ, and GLD all have very high amounts of assets under their management and a very high amount of liquidity based on the average daily share volume over the past 3 months. And so the reason I say hidden alternatives is because the following SPYM is much lower than SPY for both assets under management and daily shares traded as well as QQQM that is even lower in the rankings.
And crazy enough, GLDM doesn't even make the top 100. Now, realize one very important thing when I say the cheaper alternative is that I'm going based off solely the expense ratio when I say that for each of the ETFs, but that actually doesn't mean it is the cheaper option for you because that actually depends on how you invest.
So, to clearly explain this and why there's also both options, let's now go over when to use each. So, a couple of charts that I like to better understand the difference here come directly from Bloomberg Finance where they show the difference in cost for someone with a shorter time horizon would ideally want to choose SPY due to its lower transaction cost.
You see, as of the recording of this video, SPY has a 0% 30-day median bidesque spread, which pretty much means that because there is plenty of supply and demand from investors, the price a buyer is willing to pay for a share compared to the price a seller is willing to sell the shares for, the spread between those is very slim because so many investors out there are buying and selling the stock to each other.
Where on the other hand, SPYM has a 0.01% a 1% 30-day median bid spread, which means the more trades that you do, the more costly things are going to become. So, based on one trading numerous times throughout the same year, Bloomberg Finance shows how transaction cost actually lead you to much higher fees with SPYM than SPY depending on how often you trade.
where if we look at the impact of someone with a longer time horizon, say 10 years, the total cumulative cost of ownership for SPYM rather than SPY saves an investor greatly. So to simply break down the difference between SPY and SPYM, if your investment priority is to minimize liquidity cost, you would choose SPY.
Or if it is to minimize holding costs long-term, SPYM is the better option. Now, this exact same concept applies to QQQ and QQQM, where QQQM is better for long-term investors. That especially makes sense if you're building retirement accounts like IRA or 401ks over time and you're not frequently trading stocks or say you're dollar cost averaging with fixed contributions or you prioritize for a buy and hold portfolio or you're starting young with decades of time for savings on the fees.
or on top of that if you are forced to buy fractional shares. We mention that because QQQM has a share price in the 200s where QQQ is in the 600s. SPY and SPYM also have a very similar impact here because SPY is in the $600 range and SPYM is actually under $100. Even GLD is almost $400 per share compared to GLDM that is under $100.
So, like I said, if your broker does not allow fractional shares, the difference here can make things a lot simpler, especially if you're dollar cost averaging or investing over time, you may as well go with the cheaper alternative. But realize that the investments like QQQ or SPY, they would be better suited for active traders, mostly recommended for those that are frequently trading, using option strategies, have large positions that need liquidity for an efficient execution, or those that actively looked to adjust positions often.
All in all, if you are looking to simply buy and hold for many years, the cheaper expense ratio alternatives such as SPYM, QQQM, and GLDM are likely to be more favorable for you. And here's why. Let's say you have $10,000 invested into the S&P 500 through the ticker SPY, and you decide to invest $500 every month throughout your entire career.
Well, based on a rough estimate of.1% of an expense, that means your end portfolio would be roughly $3 million. And the total cost throughout this entire time would have been about $87,000 in total fees. But truth be told, if you simply typed one more letter and bought SPYM throughout your entire career instead, being an expense ratio of 002% compared to.1%, you would end up having roughly $70,000 more in your pocket because your total cost after all the years would now only be $17,000 instead.
Which by the way, if you are finding this video helpful, don't forget to hit the like and subscribe button for future content like this. Now, one more very important thing to understand here is that if you currently own a fund like SPY or QQQ in a taxable account, selling to make the switch to QQM or SPYM will trigger capital gains.
So, if you have gains that would be triggered, it likely wouldn't be worth making the switch. But I will say if you have losses, you could benefit from tax lost harvesting so that those losses could offset other gains that you may have. All in all, both versions are great investments that provide great diversification whether you want the S&P 500 or the NASDAQ 100.
But I will mention one fact is that there is a fairly large overlap of 53% by weight between the two funds. And that is because many of the top holdings are very similar. But in the end, understand that if you are one looking to build long-term wealth through consistent contributions, that spym or QQQM are likely to be your better bet than the other alternative.
Where if you are one trading frequently or using options, the lower transaction costs with investments like spy or QQQ due to its higher liquidity are likely to be the better option. Now, if you want to see more content on this topic, I'll have direct links below to further articles and even other videos posted on the Invest Lane channel, which I'll also leave an entire index fund cheat sheet I created in the description below for you if you want to check that out.
That is completely free. And not to mention, but if you want to check out some of the top brokerage accounts or even high yield savings accounts that are currently available in the market, I'll also have direct links below for them as well. End of the day, I want you to do what's best for your finances, but do know that depending on the ones you choose, I may earn a commission for it, which is greatly appreciated.
And as always, don't forget to hit the like, subscribe, and notifications button for future content like
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