The tech-heavy Nasdaq Composite has been the top-performing major index amid the challenges created by the coronavirus and economic uncertainty this year.
Data by YCharts
The index’s performance is similarly impressive if you zoom further out: The Nasdaq climbed roughly 370% over the last decade while the S&P 500 index rose 195%, and the Dow Jones Industrial Average is up 157.5%. Meanwhile, shares of tech giant Apple (NASDAQ:AAPL) have soared by roughly 1,000% across the same stretch.
Apple now stands as the biggest company in the Nasdaq and the largest U.S. company, with a market capitalization of roughly $2 trillion even after a recent pullback. Those strong performances from both the tech sector and its largest company raise the question: Should investors buy into Apple stock or an index fund that includes many of the technology industry’s most influential players?
Image source: Getty images.
The basics of owning an index fund vs. owning an individual stock
Before comparing an investment in the Nasdaq with an investment in Apple, it’s worth establishing some basics about the index, ways to invest in it, and an important way that investing in indexes differs from investing in individual stocks.
The Nasdaq Composite Index includes more than 2,500 companies. Investors won’t be buying into the Nasdaq directly, and buying each company included in the index would probably involve more effort than makes sense for most investors — even though the now more widely-available option to purchase fractional shares makes it more financially feasible.
Your chief instruments for investing in the Nasdaq will be the Fidelity Nasdaq Composite Index Tracking Stock ETF (NASDAQ:ONEQ) and the Fidelity Nasdaq Composite Index Mutual Fund (NASDAQMUTFUND:FNCMX), each of which bundles all of those index stocks into a single security. The exchange-traded fund (ETF) variant offers most investors a greater degree of flexibility, so that will be the focus of the comparison with Apple stock for the purpose of this article.
Like most exchange-traded funds, Fidelity’s Nasdaq Composite ETF has a management fee that’s subtracted from the fund’s dividend payout on a quarterly basis. It currently has a net expense ratio of 0.21%. Meanwhile, ownership of individual stocks of U.S.-based companies typically doesn’t come with any additional annual fees.
With those distinctions out of the way, let’s take a closer look at the benefits of owning Apple stock compared to owning Fidelity’s Nasdaq Composite ETF.
Both have their strengths
Apple has the world’s most-powerful technology hardware brand, and that strength extends to its software and service offerings. Members using the company’s iOS mobile operating system spend far more on average than users of the Android operating system from Alphabet‘s (NASDAQ:GOOG)(NASDAQ:GOOGL) division, and the software and services segment has a long runway for growth.
In addition to its market-shaping iPhone hardware, it’s currently the leader in the potentially high-growth wearables category, with products including the Apple Watch and Air Pods putting up impressive sales and showing strong growth momentum. The company’s penchant for sleek designs and its brand strength position it to remain a leader in the evolution of wearable tech.
If you’re prioritizing growth potential over the reduced risk one gains through diversification, Apple stock stands out as the obvious pick. While the company’s massive market cap suggests that further share price gains may harder to come by, the same case could have been made at this time last year — when its market cap was about $1 trillion, or roughly half of its valuation today.
Image source: Getty Images.
On the other hand, the biggest reason to own Fidelity’s Nasdaq ETF is to get diversification both inside and outside of the technology sector. This diversification means that the fund will typically be much less volatile than Apple stock.
The Nasdaq index has an average forward price-to-earnings ratio of roughly 21, while Apple has a forward price-to-earnings ratio of roughly 36. This implies that the market expects Apple to grow earnings significantly faster than the Nasdaq average. Any individual company within the Nasdaq beating or missing earnings expectations will have a relatively small impact on the overall index, while earnings results (and other relevant news) will have a much bigger impact on Apple’s stock performance.
Investors may also want to consider each equity’s respective returned-income component. The Fidelity Nasdaq Composite Index Tracking Stock ETF has a dividend yield of roughly 1.4% after accounting for the expense fees, while Apple currently has a dividend yield of roughly 0.7%. The index fund looks better for investors who are prioritizing higher yield in the short term.
The dividend on Fidelity’s Nasdaq ETF has climbed by 250% over the last decade, while Apple has boosted its payout by 116%. Apple has surpassed the average Nasdaq dividend payout growth over the last five years (with a 58% payout increase vs. 44% for the index), but the ETF looks like a better income investment for now.
Which is better? It depends what you’re looking for
To a large extent, whether it’s better to own Apple stock or a Nasdaq fund will come down to your personal risk tolerance and what you’re looking for as an investor. Apple has many strengths and doesn’t look to be a high-risk stock, but it’s much more likely to see bigger swings — for better or worse. On the other hand, the technology sector will continue to be a driving force in the overall market growth in the decades to come, and the combination of strong growth potential and diversification adds to the appeal of owning an ETF that tracks the Nasdaq.
Investors looking to capitalize on the transformative power of technology will likely be well served by investing in either Apple or Fidelity’s Nasdaq Composite ETF. Those prioritizing higher growth potential will likely want to go with Apple, while those seeking lower risk will likely find the ETF a better vehicle for their goals.