Better buy: Apple Stock or every Nasdaq share?

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Apple (NASDAQ: AAPL) and the Nasdaq have both generated excellent returns for shareholders since the market rebounded from the COVID-19 crash a year and a half ago. Investors poured cash into large-cap tech stocks as businesses and consumers adjusted to the pandemic economy.

Which one is right for you to move forward? The answer depends on a few personal factors, but the most important information should guide you in your decision if you are considering buying one or the other.

Image source: Getty Images.

A classic dilemma

In many ways, the best buy here comes down to the classic choice between indexing and stock picking. You can certainly buy each Nasdaq share individually, but it would be much easier for most investors to use an index fund like the Invesco Trust QQQ (NASDAQ: QQQ), which tracks the Nasdaq 100.

Index funds are designed to be bought and held for the long term, and they are an effective way to diversify your portfolio. If you own a large number of stocks, you reduce the likelihood that a single stock will lower your performance, while simultaneously increasing the likelihood of holding the best performing stocks. This balanced approach to risk and reward is popular for a reason.

However, the indexing approach is not ideal for everyone. Index funds can dilute your risk, but they also limit your upside potential. It’s not uncommon for top-flight stocks to climb 200% in a single year, but a 50% return in a single year would be incredible for a major stock index.

Your appetite for risk and your need for growth ultimately dictate the best buy for your wallet. A retiree with low diversification and low tolerance for risk probably shouldn’t put too much of his or her assets in a single stock. That’s a different story for a young growth investor looking to add a new stock to an existing portfolio with a few dozen positions.

Compare historical performance

Looking at the historical results, it’s clear that Apple has provided more growth on the upside. Since 2005, the Invesco QQQ trust has generated an impressive 928% return. However, even that stellar performance was overshadowed by Apple’s 14,000% performance over the same period.

Chart showing a large increase in Apple's total return over QQQ since 2005.

AAPL Total Return Level Data by YCharts

It’s a compelling historical performance, but keep in mind that oft-quoted disclaimer: “Past performance is no guarantee of future results.” You will notice that Apple’s outperformance relative to the Nasdaq becomes less impressive over shorter time periods. In fact, the market index has overtaken Apple in the past 12 months and since the start of the year.

Chart showing the total return of the Nasdaq outperforming that of Apple since the end of 2020.

AAPL Total Return Level Data by YCharts

Apple has grown from a promising consumer electronics company to one of the world’s technology leaders. In many ways, he has fulfilled his potential. Its target markets are already heavily saturated by Apple or any of its direct competitors, and there is no guarantee that the company will ever develop something as revolutionary as the iPod or iPhone. Currently, the business does not have the same rapid growth opportunities that were available in previous years.

Apple absolutely has favorable growth prospects, but there is a good chance that its explosive days are behind it now that it has reached such a scale.

Have your cake and eat it too

The Nasdaq itself captures much of Apple’s advantages. Apple is actually the main constituent of Nasdaq, and the larger index is heavily skewed in favor of other huge tech stocks. You will notice in the second graph above how closely the two titles are correlated. If Apple’s biggest days are really behind it, you can still use the Invesco QQQ Trust to jump on board stocks like You’re here, Nvidia, Pay Pal, and Facebook.

If you are convinced that Apple is poised to enjoy several years of accelerated growth through new product launches, it may be a good idea to buy some stock. If you’re not sure Apple can speed up, then you need to consider the merits of an alternative. Chances are, the Nasdaq can give you all of Apple’s benefits while diluting the risk considerably. Most investors should probably go with the index fund in this case.

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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of its CEO, Mark Zuckerberg, is a member of the board of directors of The Motley Fool. Ryan Downie owns shares of Nvidia. The Motley Fool owns stock and recommends Apple, Facebook, Nvidia, PayPal Holdings and Tesla. The Motley Fool recommends the following options: $ 75 long calls in January 2022 on PayPal Holdings, $ 120 long calls in March 2023 on Apple, and $ 130 short calls in March 2023 on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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