S&P 500 vs. Nasdaq 100 index, how to choose a market index?


Is QQQ obviously better than the S&P 500?

Since this blog has published many articles on ETFs and S&P 500 Index, you can use “ETF” and “S&P 500” to search my blog articles and find many articles. After thinking deeply, a few friends asked me, why not choose the Nasdaq 100 index? “the return of QQQ is obviously better than that of the S&P 500 index”, it looks like there is no reason to choose S&P 500 index. This is indeed a good question, and it deserves to be discussed in depth here.

In October 2021, I was at the launch party of my first book, “The Rules of Super Growth Stocks Investing“. An audience asked me what I thought about ETFs. My answer was “only ETFs tracking broader market are recommended, and other ETFs are not recommended.

The reason is that over-filling is common, and ETFs for certain sectors do not have the advantages of active stock selection or ETFs tracking broader market.” For details, you can ask friends to search my blog for the keyword ETF, and you can see my discussion in the post of “Most investors should invest ETFs tracking broader market.”

How to query the performance of 4 market indices?

You can click on the investment tool, you can connect to my website, click on the index you want to query the major index, enter the starting and ending numbers, you can get the past annualized return of the index between the two years rate. If you enter the same starting and ending numbers, you can get the reported rate of return of the index for that year.

For an introduction to these major indices, see my previous article”Top 10 ETFs and important major US stock market index

The following is a list of well-known large-cap ETFs on the market:

Major indexCorresponding ETFsThe tool to look up the annualized return of the index, or get the rate of return for a specific year (click the link)
Dow Jones Industrial AverageDIADow Jones Industrial Average IRR Query
S&P 500 IndexSPY、IVV、VOOS&P 500 Index IRR Query
Nasdaq indexQQQNasdaq Index IRR Query
Philadelphia Semiconductor indexSOXXPhiladelphia Semiconductor Index IRR Query

Which market index suits most investors?

For “the vast majority” of retail investors, a good U.S. stock market index must be no-brainer. It is a very positive term here, which means that people who don’t know anything can take care of it and are also eligible to invest in the target.

Therefore, the underlying broad market index must meet the following requirements:

  • No industry or specific area of expertise to consider, no stock picking, no research; no need to English proficiency required.
  • The diversification is enough to fully represent the U.S. stock market; because the U.S. stock market always rises in the long run.
  • The volatility should not be too much, so it is suitable for most retail investors to hold.
  • It is suitable for everyone to hold for a long time, invest when they have spare money, or dollar cost average, without considering the market situation.
  • It is highly liquid and easy to sell; basically, the four major U.S. stock market indexes meet this requirement.
  • The cost to hold should not be too high.

S&P 500 index

The S&P 500 would be more suitable for most people because it has 500 constituents and is sufficiently diversified across all industries. And across the three major exchanges of NYSE, Nasdaq, and AMEX (for a detailed description of the three major exchanges, please see section 2-1 of my book “The rules of ten baggers“), it is a veritable U.S. stock market index, which is also after 1970 (the Nasdaq had not yet come out), it gradually replaced the Dow Jones and became the main reason for representing the U.S. stock market index.

For example, Yuanta 0050 in Taiwan stocks has only 50 constituents, and the number is too small. Therefore, there will be an unbalanced phenomenon that TSMC once accounted for 40% of the weight in the bull market in 2021. There are many reasons. But even if TSMC has the highest weight in Taiwan stock market, it should not be tilted to 40% (TSMC does not account for more than 40% of Taiwan’s stock market value), and the slower update frequency of ETF issuer is also one of the factors.

In addition to the inefficiency of the issuer, the main reason is that outstanding individual stocks can easily determine the performance of the index, and the main reason is that there are too few constituent stocks. Moreover, nearly 70% of the industries in Taiwan stocks are electronic stocks, and the industry is too small. Even if the number of constituent stocks increases, the constituent stocks with large market capitalization will still be concentrated in electronic stocks, so this is impossible to solve the limitations of Taiwan stocks market.

Most of the S&P 500 ETFs on the market have the lowest holding costs of any ETF I know of, especially IVV and VOO.

Nasdaq 100 index

Invesco’s QQQ tracks the Nasdaq 100 index. From a certain point of view, it is a “super-large ETF in a specific field”, but this field is the Nasdaq Exchange, and the Nasdaq 100 excluding the financial stocks of Nasdaq, except for a few technology stocks in the broad sense, almost all of them are “technology stocks in the broad sense”, and the diversification is not so good.

Tech stocks have built the Nasdaq over the past 30 years, making the Nasdaq far more rewarding than the Dow and S&P 500. But there may be another sector of stocks driving U.S. stocks over the next 30 years (which won’t necessarily happen), and these new stocks may not be listed on the Nasdaq as much.

However, the constituent stocks of the Dow Jones and the S&P 500 are not selected from one exchanges market only like QQQ, but the three major exchanges in the US stock market. Compared with QQQ, it has an advantage in the factor of being suitable for permanent holding.

The poor diversification of the QQQ (this is compared with the Dow Jones and S&P 500 indexes, the QQQ is still better than the general ETFs not tracking broader market), this will cause two major results, it is a double-edged sword. The first is the good part, because most of the gains that have driven U.S. stocks in the past three decades have come from technology stocks listed on Nasdaq.

The downside is that the volatility is too high; in a bear market or crash, the drop is much larger than the Dow and S&P 500, such as year 2022. I mentioned on page 79 of my book “The rules of ten baggers” that between 2000 and 2002, the Nasdaq fell by as much as 78%! It will have to wait until 2015 to recover all the lost ground.

In addition, the holding cost of QQQ is much higher than that of most S&P 500 ETFs on the market. This is a disadvantage for long term investors.

Other considerations

The above is based on the consideration of most retail investors. If you can tolerate the high volatility of the Nasdaq, then choose the QQQ, and you are willing to invest for a long time, not the S&P 500, but it is for you. Assuming your circle of competence or major is in tech again, even better.

Nasdaq 100
credit: vest.co.in


S&P 500 indexNasdaq 100 index
Price fluctuationFairVolatile
Long term rewardFair, 30 years from 1993 to 2022, excluding dividends, the annualized return is 9.61%Much better, 30 years from 1993 to 2022, excluding dividends, the annualized return is 9.61%
Number of constituents500100
Industry diversificationGoodFocus on technology
Holding costVery low (VOO or IVV: 0.03%)High (QQQ: 0.2%)

Table for US stock investment toolset

Special reminder

For all major market index annualized return query tools listed in the table; including Taiwan Stock Index, Dow Jones Index, S&P 500 Index, Nasdaq Index, Philadelphia Semiconductor Index, not only annualized return query , you can also query the index return rate in any year──just enter the year you want to query in both the start and end fields.

The following is a list of must-have US stock investment free tools developed by Andy Lin:

The online tool I developURL for the tool
For detailed function description, please click the description article directly
Andy Lin’s Indices
Andy Lin self-compiled Index, daily updated (including growth stock index, moat index, tracking stock index and other three major indices)Andy Lin’s IndicesAndy Indices will be daily updated on the homepage
Annualized rate of return and compound interest
IRR calculatorIRR calculatorIRR calculator
Simple and compound interest calculatorSimple and compound interest calculator Simple and compound interest calculator
Famous market index
Taiwan stock exchangeQuerier to Annualized rate of return for Taiwan Stock Exchange Querier to Annualized rate of return for Taiwan Stock Exchange
Dow Jones Industrial Average (DJIA) IndexQuerier to Annualized rate of return for Dow Jones Industrial Average Index Querier to Annualized rate of return for Dow Jones Industrial Average (DJIA) Index
S&P 500Querier to Annualized rate of return for S&P 500 Index Querier to Annualized rate of return for S&P 500 Index
NasdaqQuerier to Annualized rate of return for Nasdaq Index Querier to Annualized rate of return for Nasdaq Index
Philadelphia Semiconductor Index Querier to Annualized rate of return for Philadelphia Semiconductor Index Querier to Annualized rate of return for Philadelphia Semiconductor Index (SOX)
Important ecnomic data query
US historial GDP querierUS GDP querier US Gross domestic product (GDP) querier
Querier of US Inflation RateQuerier of US Inflation Rate Querier of US Inflation Rate
DCF (Discounted Cash Flow) CalculatorDCF (Discounted Cash Flow) Calculator DCF (Discounted Cash Flow) Calculator
S&P 500 historical PE Ratio and average QuerierS&P 500 historical PE Ratio and average Querier S&P 500 P/E ratio has been rising in the past century, S&P 500 PE Ratio and Average Querier
Data share
Data and sample downloadSample and file downloadSample and file download

For the detail, please see “Free online US stock investment toolset".

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