Investing in index funds is a straightforward way to grow your wealth regardless of how big or small your portfolio is. Instead of trying to pick individual winners, you invest in a fund that mirrors a specific market index, like the Vanguard 500 Index Fund (VOO), which tracks the S&P 500, or the Invesco QQQ Trust, Series 1 (QQQ), which tracks the Nasdaq 100. This approach offers diversification, lower costs, and less risk exposure compared to picking individual stocks or actively managed funds.
S&P 500 vs Nasdaq 100
Both the S&P 500 and Nasdaq 100 are among the top three most popular U.S. market indexes. The S&P 500 is a stock market index that tracks 500 of the largest publicly traded companies in the US markets across various industries. The Nasdaq 100 comprises 100 of the largest non-financial companies listed on the Nasdaq stock exchange, with a strong emphasis on the technology sector. But what’s the difference between them when it comes to investing, and how could they affect the shape of your portfolio?
The Nasdaq 100 was founded in 1985, and since then it has been averaging a 14.25% return per year compared to 11.57% in the S&P 500 for the same time period. Does this mean Nasdaq 100 is the better option? The answer is that it depends. While the S&P 500’s return was lower, it had a much more stable and smooth growth. The Nasdaq 100 had a much higher volatility, and if you invested at the wrong time, the actual average return would’ve been much lower. For example, if you invested in the Nasdaq 100 at the height of the dotcom bubble in the year 2000, you would’ve had to wait till March of 2015 to recover your losses. If you had invested in the S&P 500 instead, you would’ve recovered your losses in 2007, but then it would’ve crashed in 2008 and you would’ve recovered again in 2012, still 3 years ahead of the Nasdaq 100.
If you invested $100 in VOO vs QQQ
Considering combining both indexes could be a good strategy that would allow you to capture the higher returns of the Nasdaq 100 while minimizing the risks associated with it. The past 10 years, the Nasdaq 100 had a much better return rate than the S&P 500. According to Stoculator's stock calculator, if you invested $100 in QQQ 10 years ago and kept reinvesting the dividends, you’d have $545.19 today (as of February 2, 2025). That’s an annual return rate of 18.48%. If you invested $100 in VOO 10 years ago, you’d have $349.73, including reinvested dividends. The annual return rate in this case is 13.34%.