QQQ versus SPY

Fairness in Indexing

With all the research and talk about the superiority of indexing over active management, a major issue not yet addressed here is which index has the highest performance? Every index is just a portfolio. Indexes vary by their portfolio selection criteria. The S&P is based upon a sector neutral market capitalization criteria, size. The Nasdaq 100 although is based, in-effect, upon a technology sector specific criteria. The Nasdaq picks winners, the tech sector, which is a basic violation of modern portfolio theory (MPT).

As we approach 2017 year-end, the outperformance of the Nasdaq 100 Index over the S&P 500 just gets larger and larger. It's only fair to review the long-term performance of the Nasdaq and compare this to the S&P. The relevant symbols here are the SPDR S&P 500 ETF (SPY) and the PowerShares QQQ ETF (QQQ). Of course, there are other similar ETFs but SPY and QQQ are the largest, most active of the lot.

Results

Yahoo data for the QQQ starts on 3/10/1999 and our results begin with this date to the present (11/27/2017).

The below are all continuously compounded rates of return.

Annualized Returns
as of 11/27/2017

	SPY	QQQ
1 month	11.7%	38.6%
3 month	26.8%	243.3%
6 month	21.4%	139.6%
1 year	18.6%	79.6%
3 year	9.6%	31.0%
5 year	14.2%	28.8%
10 year	7.8%	17.2%
15 year	8.8%	15.6%
Since QQQ Inception	5.6%	9.3%

Risk and Reward

	SPY	QQQ
3 year mean	8.7%	12.3%
3 year standard deviation	5.2%	7.6%
5 year mean	14.9%	17.4%
5 year standard deviation	8.9%	8.9%
10 year mean	6.8%	10.9%
10 year standard deviation	19.4%	23.9%

Conclusion

QQQ indeed sharply outperforms the SPY even after the disasterous three year tech collapse at the inception of the fund. As for risk, the QQQ is generally higher risk, but only the most recent 3 year period has a higher risk adjusted return for the SPY.

In spite of these results, the question for investors remains: how period dependent is the QQQ outperformance?  The recovery after the 2009 recession was a good long-term test and QQQ sharply outperformed once again.

Does this mean investors should abandon the SPY for the QQQ? In theory, no, because the QQQ implicitly means picking winners and MPT is cautionary against that approach. In practice, the nature and ubiquity of tech may offset the negatives of stock picking, and the results are a powerful testament.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.