Learn if the Invesco QQQ Trust suits your stock portfolio. Explore its benefits, risks, and key factors to consider before making an investment decision.
TABLE OF CONTENTS
- Understanding The Invesco QQQ
- QQQ Performance Analysis
- Benefits Of Investing In QQQ
- Risks of Investing In QQQ
- How To Compare QQQ To Other ETFs
- How To Decide If QQQ Is Right For Your Stock Portfolio
- Bottom Line
Understanding The Invesco QQQ
QQQ is an index fund that was established in 1999 to invest in large, non-financial Nasdaq stocks. Let's begin this analysis with a look at the fund's approach and its most important characteristics.
Overview of QQQ
Invesco QQQ tracks the Nasdaq-100, which includes the 100 largest non-financial stocks listed on the Nasdaq exchange. Largest is defined in terms of market capitalization. Index constituents must also have a three-month average daily traded value of at least $5 million. This ensures reasonable liquidity. The index and QQQ use a modified market capitalization weighting strategy. Allocations are determined by company size, but adjustments are made to limit the largest companies from dominating index performance. No company can comprise more than 24% of the index, for example. Also, the aggregate value of companies with allocations higher than 4.5% cannot exceed 48%. QQQ has a heavy technology focus, but all other sectors outside of financials are represented.
QQQ Key Features
- Ticker: QQQ
- Fund family: Invesco
- Expense ratio: 0.20%
- Top holdings: Apple (AAPL), Microsoft (MSFT) and Nvidia (NVDA)
- Number of holdings: 101
- Dividend yield: 0.6%
- Fund market value: $291.6 billion
QQQ Performance Analysis
The table below shows QQQ's average annual returns for one, three, five and ten-year periods alongside the same metrics for SPY and VTI. SPY tracks the S&P 500 and VTI tracks the entire U.S. stock market. Data as of June 30, 2024. Data source: Morningstar.
You can see that QQQ has handily outperformed these two funds and the market as a whole—with average returns exceeding 18% annually in three of four periods. The lower three-year return relates to QQQ's 32.6% loss in 2022 when investors pulled away from technology stocks temporarily. That was one of the few years in QQQ's history that the fund notched a double-digit decline. It also happened in 2018, 2008 and 2000 through 2002. In all other years from 1999 forward, QQQ gained value. The fund's best year was 2023, when it gained 54.9%.
Benefits Of Investing In QQQ
QQQ’s most appealing characteristic is its ability to outperform the market. The fund’s strength comes from its technology exposure, though it is moderately diversified into other economic sectors.
- Potential To Outperform: Past performance does not guarantee future results, but it is easy to covet QQQ’s historical returns. Despite the 2022 dip, the QQQ portfolio has grown impressively. There aren’t many other funds that have performed as well for as long relative to the overall market.
- Technology Exposure: QQQ’s heavy technology exposure has been driving the growth. The tech sector has and will continue to create value in the U.S. and around the world. Outcomes related to ongoing tech innovation range from improved efficiency across all economic sectors to the solving of complex problems in health care, transportation and logistics. QQQ stocks will likely be responsible for some of those outcomes, which would drive further gains.
- Moderate Diversification: Investing is a humbling enterprise, because even the most likely predictions can be wrong. Diversification protects you in those situations. Tech stocks comprise nearly 52% of the QQQ portfolio. Communication services stocks make up another 15%. The remaining 33% is spread across various sectors, including consumer discretionary, consumer staples and materials. Those exposures could provide a stabilizing influence to offset some volatility in technology.
Risks of Investing In QQQ
Investing in QQQ also has risks. These include sector concentration, volatility and cost.
- Sector Concentration: The risks and rewards of investing often come from the same sources. Heavy technology exposure could deliver riches or rags, depending on the economic climate. If you choose to invest in QQQ, be sure to evaluate your overall portfolio exposure to technology. The biggest and best stocks in QQQ are also in the S&P 500, which may mean you already own them through another fund. This could create a concentration in technology that's outside your comfort zone.
- Volatility: QQQ is a volatile fund. With a beta of 1.19, it is more reactive than the S&P 500, which has a beta of 1. The good news is that, historically, QQQ’s downswings have been more than offset by its gains. The bad news is you can only benefit from that behavior if you have the fortitude to stay invested when the fund loses value temporarily.
- Cost: QQQ's expense ratio is 0.20%. That equates to $20 annually in fees for every $10,000 invested. This is not a high expense ratio, but it's not low either. For context, there are S&P 500 funds with expense ratios below 0.04% and technology funds with expense ratios below 0.01%. FTEC is an example of the latter. This technology-focused Fidelity index fund charges 0.084% for expenses. Given QQQ's strong returns, the expense ratio is not a dealbreaker. That would change if QQQ's performance deteriorates in a lasting way.
How To Compare QQQ To Other ETFs
To compare QQQ with other index funds, it is essential to evaluate each fund's volatility, top holdings, expense ratios and 10-year average returns. The table below outlines these factors for QQQ, SPY, VTI and VGT. Table data source: Morningstar, Invesco, SSGA, Vanguard.
As you can see, QQQ is more volatile and concentrated than SPY or VTI but less volatile and concentrated than VGT. QQQ also has a higher expense ratio and slightly lower 10-year average annual return versus VGT. For more funds to compare to QQQ, see my review of popular Vanguard retirement ETFs.
How To Decide If QQQ Is Right For Your Stock Portfolio
What the above comparisons mean to you depends on your risk tolerance, investing goals and timeline.
- Risk tolerance: Owning QQQ requires moderate-to-high risk tolerance. The fund has and will continue to show large value swings. To be an effective QQQ shareholder, you should be able to accept that volatility without panic or sleepless nights.
- Investing goals: QQQ serves the primary goal of wealth creation. It is not an appropriate choice if your investing goal is capital preservation.
- Timeline: QQQ is a long-term play. You should have at least a 10-year timeline. With a shorter horizon, you risk having to liquidate when the fund's value has dipped temporarily.
Bottom Line
QQQ has historically delivered strong investment returns, albeit with a good dose of volatility. If you have aggressive wealth goals plus the time and patience to handle a wild ride, this tech-heavy fund could fit nicely into your investment plan.