I love March Madness. For the uninitiated, this is the annual basketball tournament for the NCAA men’s and women’s championship. I really enjoy watching and playing basketball so it is of course right up my alley. (You can even see some of the bball skills here.) But the past few years, there has been one thing that I really, really hate about it. And that is…the incessant commercials from and sponsorship of March Madness by the Invesco QQQ mutual fund.
Why I hate that QQQ is inundating March Madness
Well, first of all, I pretty much hate any commercials. But I get it.
And I would never have even noticed or understood these QQQ commercials before beginning my financial education and journey.
But the point is that now I do notice them. And they annoy me. So why?
For starters, what is the QQQ mutual fund?
The Invesco QQQ is a mutual fund that tracks the Nasdaq 1000. So, that means it is a tech-centric mutual fund with large holdings in companies like Apple and Facebook, etc.
It calls itself a passively managed mutual fund…technically an index fund.
But is it really?
This is a bit of wolf-in-sheep’s-clothing advertising in my opinion. Because many people will assume that index fund is synonymous with broadly diversified, low cost index fund. But that is not the case.
It’s not broadly diversified
Technically an index fund is any mutual fund that tracks anything. They started off tracking the entire stock market or large swaths of it. But that is not always the case now. Many “index” funds track very small sectors of the market. And are thus not broadly diversified despite technically being indexed.
The Invesco QQQ fund is like this. Owning a large collection of tech funds is not broadly diversified. It’s better than some other more narrow pseudo-index funds. But still not something that I would want as the foundation of my – or anyone else’s – investment portfolio.
So, QQQ is not broadly diversified, but is it low cost?
And it’s not low cost
Sort of. Its expense ratio is 0.20%. That’s not atrocious. And they do tout it as being a major advantage of the fund. And that is just not the case.
Of course, to someone new to investing, an expense ratio of just 0.20% seems incredibly low. But not when you compare it to the expense ratio of a truly low cost, passively managed, broadly diversified index fund like VTSAX with an expense ratio of just 0.04%.
Don’t believe me? Take a look at this great graphic from Motley Fool showing the difference in returns between QQQ and a low cost index fund with an expense ratio of 0.03%
So yeah, that’s a big difference!
Also, we have to ask ourselves why the expense ratio for QQQ is so much higher if it is truly passively managed like an index fund?
To dig deeper into this, we need to look at the turnover ratio of the fund. The turnover ratio is a measure of how many of stocks in the fund “turn over” annually. So a fund with 100% turnover ratio would change its fund composition completely every year.
The turnover ratio of QQQ is 7-8%. This is not huge but it is about double most other broadly diversified index funds. So, even though QQQ says it is passively managed, there is perhaps some more active management than we are led to believe.
And it’s that sort of marketing trickery that makes me hate March Madness for having this sponsor. It’s like an advertisement for salads at McDonald’s that actually have more calories than a Big Mac. I just don’t like it.
However, there is one important question we haven’t addressed yet…
How do QQQ and VTSAX compare?
VTSAX here just represents an average low cost, broadly diversified total stock market index fund.
Based on a comparison run in PortfolioLabs, $10,000 invested in VTSAX since Nov 13, 2000 has shown a total return of 375.43%, lower than QQQ’s total return of 407.90%.
So, QQQ has outperformed VTSAX. Well, not so fast as this does not include the associated expenses, just the gains and dividends accrued. But regardless, the returns are close. And more recently, QQQ has shown better returns than VTSAX in shorter time periods.
However, the risk associated with QQQ in terms of daily standard deviation and maximum drawdown are significantly greater.
So, is QQQ really bad for being a March Madness sponsor?
No of course not. We live in a free market and anyone can advertise anywhere that will let them.
And honestly, there are way worse ways to invest your money than in the QQQ mutual fund. Like cryptocurrency, actively managed mutual funds, and other tempting but best avoided investments like these.
My disappointment just comes from the slight misrepresentations that most investors will miss. Just like I would have a short time ago…
But what will happen in the future? And what should we invest in?
The answer to the first question: Who knows?
Which leads to the answer to the second question: Since neither I nor anyone else has a working crystal ball, you will find me continuing to invest for the long term in broadly diversified, low cost index funds designed to capture total market gains.
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What do you think? Should QQQ be a March Madness sponsor? Or no? Do you invest in QQQ? Let me know in the comments below!