This post was originally published on this site

Investment Thesis

Investors looking for tech exposure in their portfolio often choose the Invesco QQQ ETF (QQQ). It has nearly $140 billion in assets and is one of the five largest ETFs in the marketplace.

So why is Invesco launching a 2nd Nasdaq 100 focused ETF to compete directly with it? The simple answer is cost.

In this article, I’ll look at the Invesco Nasdaq 100 ETF (QQQM) and determine which of the two funds investors might prefer.

Invesco Launches 2nd Nasdaq 100 ETF

If you’re a tech investor, you’ve probably at least considered the Invesco QQQ ETF (QQQ) at some point. It tracks the popular Nasdaq 100 index and is now the 5th largest ETF in the marketplace, behind only a trio of S&P 500 index funds and the Vanguard Total Stock Market ETF (VTI). Thanks to a 45% return over the past year, assets under management have grown more than 80% over the same time frame.

And while the QQQ remains perhaps the go-to ETF for tech exposure, Invesco just outdid itself with a potentially better choice.

Earlier this month, the company launched the Invesco Nasdaq 100 ETF (QQQM), another ETF meant to track the index. How is QQQM different than QQQ? As far as fund composition is concerned, it’s not. Both intend full replication of the Nasdaq 100 and performance is expected to be virtually identical.

So why would Invesco launch a fund that’s pretty much a carbon copy of one that it already has and is incredibly successful? The simple answer is cost.

QQQ has an expense ratio of 0.20%. QQQM comes in at a modestly cheaper 0.15%.

QQQ vs. QQQM

While investment management fees in the ETF space continue to move lower and lower, QQQ has never really budged. It’s stuck at 0.20% for some time, a comparatively far more expensive fee than funds, such as the Vanguard S&P 500 ETF (VOO), which charges a scant 0.03%.

In reality, QQQ has never really had to drop its expense ratio to compete. It’s the go-to ETF for investors seeking tech exposure in their portfolios. With tech stocks hugely outperforming the broader market for years, investors still flock to it regardless of how much it’s charging.

But Invesco sees an opportunity to capture even more of the market. QQQM allows it to better compete on price, while not giving up its original cash cow. Why doesn’t Invesco just chop the fee on QQQ from 0.20% to 0.15% and save itself some hassle? The reason is fee income. The company is already earning hundreds of millions of dollars on QQQ and it almost certainly doesn’t want to give any of that up. It’s easier (and more fee aware) to offer a lower-cost alternative on new money than simply offer a discounted price on the total asset pot.

So, which of the two funds should investors choose? Depends on which kind of trader/investor you are.

If you fancy yourself more of a trader who likes to move in and out of positions, you’ll probably still be better off with the higher fee QQQ. With such a large asset base, QQQ is highly liquid and trading spreads are virtually nil, often at just 1 basis point. QQQM, being a new fund with a smaller asset base, will have much wider spreads and that would be more detrimental to frequent traders than the loss of 0.05% on expenses over the course of a full year.

If you’re a long-term, buy-and-hold investor, I don’t see any reason why you shouldn’t go with QQQM. The 0.05% difference equates to just an extra $5 a year for every $10,000 invested, so the benefits won’t necessarily be huge. But, if the two funds are essentially identical and you plan on hanging on to the position for years, why not capture the extra dollars if you can?

QQQM Is Already Drawing Assets

Are investors taking notice of QQQM? Early evidence suggests they are. It’s only been around for about two weeks, but it’s already at nearly $300 million in total assets.

Data by YCharts

Granted, some of that is seed money put up by Invesco to get the fund launched, but it’s a good start nonetheless. Plus, QQQM has averaged about 36,000 shares traded daily, a relatively healthy number for a brand new ETF launch. It doesn’t come anywhere near the 45 million shares that QQQ trades daily and probably never will, but it does suggest there is some early liquidity here.

Conclusion

QQQ investors should at least consider QQQM here, although it may only be appropriate for a percentage of that population. It’s a very strategic move on Invesco’s part to offer a lower-cost version of QQQ. The vast majority of all ETF inflows are going to funds with ultra-cheap expense ratios, so it makes sense for the company to attempt to capture a larger share of that market.

For long-term investors, I think QQQM makes a lot of sense, even in its infancy. I don’t usually advocate for buying into brand new funds since trading costs can easily eat into early returns. It would also make sense to perhaps wait a bit for the fund to become a little larger and see if trading spreads come down, but given some of the trading volume we’ve seen already on QQQM, I think now would make a perfectly adequate entry point as well.

Disclosure: I am/we are long QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.