Index vs. ETF: Understanding Nasdaq, S&P 500, QQQ, VOO, and SPY

Comparing Index Funds and ETFs: Insights on Nasdaq, S&P 500, QQQ, VOO, and SPY

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Consult a qualified financial advisor before making financial decisions.

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Investing in the stock market can be overwhelming, especially with terms like index funds and ETFs (Exchange-Traded Funds). Two of the most well-known stock market indices are the Nasdaq Composite and the S&P 500, representing different market segments. But how do they work? How do companies enter or exit these indices? And how can investors gain exposure to them?

In this guide, we’ll cover:

• ✔ What are Nasdaq-100 and S&P 500?
• ✔ How do companies enter or leave these indices?
• ✔ How do we measure their performance when companies change?
• ✔ How to invest in an index using ETFs like QQQ, VOO, and SPY?
• ✔ How major additions, like Tesla, impact an index’s performance
• ✔ How sector-specific ETFs (like financials, energy, and tech) can complement broad-market ETFs
• ✔ How Canadian investors can invest in U.S. tech giants without buying expensive individual stocks

1. Understanding Nasdaq and S&P 500

Both the Nasdaq Composite and the S&P 500 track the performance of a group of companies, but they differ in composition and focus:

Nasdaq Composite vs. Nasdaq-100

• The Nasdaq Composite includes over 3,000 companies listed on the Nasdaq exchange.
• The Nasdaq-100 is a subset of the Composite, including only the top 100 non-financial companies based on market cap.
• Tech-heavy: The Nasdaq-100 is dominated by Apple, Microsoft, Nvidia, and Tesla.

S&P 500

• Includes 500 of the largest publicly traded U.S. companies across multiple industries.
• More diversified, making it less volatile than the Nasdaq.
• Includes companies like Apple, Amazon, JPMorgan Chase, and Johnson & Johnson.

2. How Do Companies Get Selected or Dropped?

Think of stock indices as a “survival of the fittest” competition.

Selection Process:

• The S&P 500 selects companies based on market cap, liquidity, profitability, and U.S. domicile.
• The Nasdaq-100 ranks companies by market capitalization, focusing on high-growth tech stocks.

How Often Do Changes Occur?

• The S&P 500 updates quarterly, replacing underperforming companies.
• The Nasdaq-100 adjusts regularly, ensuring that only the most competitive tech firms remain.

3. Measuring Index Performance When Companies Change

Indices change, but their historical performance remains intact because they are designed to reflect market trends over time.

• Indices are weighted, meaning larger companies have more influence.
• When a company is added or removed, the index rebalances to maintain its structure.
• Even if different companies are in the index from January to December, the overall trend still reflects the market’s top players.

4. Tesla’s Entry into the S&P 500 & Its Impact

A great example of how a company addition can impact an index’s performance is Tesla’s entry into the S&P 500 in December 2020.

• Tesla met the S&P 500’s inclusion criteria after reporting four consecutive profitable quarters.
• When Tesla joined, its stock was on a rapid rise, making it one of the largest new additions in S&P 500 history.
• Because S&P 500 ETFs (like VOO and SPY) must buy shares of newly added companies, demand surged for Tesla’s stock, temporarily boosting its price.
• The addition significantly impacted the S&P 500’s Year-to-Date (YTD) performance, as Tesla’s gains helped drive the index higher in 2021.

5. How to Invest in an Index?

You can’t directly buy an index, but you can invest in ETFs that track them.

What Are ETFs?

• ETFs are a bundle of stocks that mirror an index—meaning if you buy an S&P 500 ETF, you’re investing in all 500 companies in the index.
• ETFs trade like stocks and offer diversification with a single purchase.

6. QQQ vs. VOO vs. SPY: Which ETF is Right for You?

Compare the major ETFs tracking Nasdaq-100 and S&P 500 indices:

• QQQ – Tech-heavy, Nasdaq-100, more volatile
• VOO – S&P 500, broad U.S. market, lower expense ratio
• SPY – Similar to VOO, but a bit more liquid

7. Beyond Broad ETFs: Sector-Based ETFs as an À La Carte Strategy

While broad market ETFs like QQQ, VOO, and SPY provide diversification, some investors want more control over their exposure.

• Tech ETFs: Invest in leading tech stocks like Apple, Microsoft, and Nvidia.
• Financial ETFs: Own shares of major banks like JPMorgan Chase and RBC.
• Energy ETFs: Get exposure to oil, gas, and renewable energy companies.
• Healthcare ETFs: Gain exposure to biotech, pharmaceuticals, and healthcare giants.
• Real Estate ETFs: Invest in real estate investment trusts (REITs).

8. Canadian Investors: Investing in U.S. Stocks Without High Costs

For Canadian investors, buying individual stocks of the Magnificent 7 (Apple, Microsoft, Nvidia, Tesla, Amazon, Google, and Meta) can be costly. Some shares trade at $500–$1,000+ USD, meaning a $1,000 investment wouldn’t even buy one full share.

Solution: Canadian ETFs That Mirror U.S. Stocks

Many Canadian-listed ETFs bundle these high-growth stocks, allowing investors to gain exposure at a much lower cost (often under $100 per unit).

Why Choose a Canadian ETF Instead?

• Lower cost per unit – Instead of paying $1,000+ for one stock, you can invest in a diversified ETF for under $100 CAD.
• No U.S. currency conversion needed – Avoid exchange rate fees.
• Diversification – Instead of owning just one company, you get multiple.

Popular Canadian ETFs That Track Nasdaq & Magnificent 7

• HXQ.TO (Horizons Nasdaq-100 Index ETF)
• XQQ.TO (iShares Nasdaq-100 Index ETF)
• ZQQ.TO (BMO Nasdaq-100 Equity Hedged ETF)
• TEC.TO (TD Global Technology Leaders ETF)

Final Thoughts: Index ETFs + Sector ETFs for a Balanced Portfolio

• ✔ Use broad market ETFs (VOO, SPY, QQQ) for long-term stability
• ✔ Add sector ETFs (financials, tech, energy) to adjust your exposure dynamically
• ✔ For Canadian investors, use TSX-listed ETFs to invest in U.S. stocks at a lower cost

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