This index has gained steadily since its inception and has surged in recent years, beating many of the well-known indices. But should investors own this index?
Aug. 31, 2020
The Invesco QQQ Trust (NASDAQ: QQQ) fund aims to mirror the performance of the NASDAQ 100. The NASDAQ 100 consists of 100 large-cap stocks and is predominantly tech orientated and excludes financial companies. The Invesco QQQ Trust holds all the stocks in the NASDAQ-100 Index including the “big tech stocks” with four of them boasting market caps of over $1 trillion. The trust pays a quarterly dividend and has an expense ratio of 0.20%. This ETF has reached new all-time highs due to its core holdings such as Apple and Microsoft, who have also managed this feat in recent days.
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Historical gains comparison
The Invesco QQQ Trust has replicated the NASDAQ 100 success and has continued to hit new highs in recent times. Over the last year, the trust has returned roughly 58% and in the previous five years, it has returned approximately 176%.
In comparison, the Vanguard S&P 500 Index , which tracks the 500 largest companies in America, has returned 21% over the last year and 75% over the previous five years. The Dow Jones Industrial Average ETF which tracks 30 “blue-chip stocks” and is price-weighted has lagged both the other indexes, returning just under 10% over the last year and 70% over the last five. Only two of the five largest holdings in the Invesco QQQ trust are in the DJIA ETF, and these two have less influence due to price weighting. These factors have helped the Invesco QQQ Trust to outperform its peers.
Why is the Nasdaq so strong?
The tech sector has performed strongly in recent months and years driven by companies such as Apple (NASDAQ: AAPL), which is currently the only company with a market cap of over $2 trillion. Apple is also the top holding in the trust at roughly 13%. This strength of the tech sector has helped the Invesco QQQ Trust to gain due to its high concentration in tech stocks.
The fund’s weighting is based on market cap with tech stocks accounting for seven of the top ten companies in the fund with the other three consisting of PayPal, Nvidia, and Tesla. The top ten holdings account for just over half of the fund, and while this could be seen as a significant risk, it has actually driven its performance. If you are looking to invest in the largest tech companies in America and not sure which to pick, this fund could be suited to you.
Will this strength last?
It’s safe to say that the “Big Tech” stocks that account for the majority of the fund will not be disappearing anytime soon. These companies continue to drive innovation and generate revenue growth year-over-year. Although the Invesco Trust is tech orientated, nearly half of these companies pay dividends.
However, despite the size and maturity of many of these larger companies that may seem “too big to fail” there are still some risks that investors should be aware of. Antitrust hearings are perhaps the main concern for these companies at the moment with the CEO’s of Facebook, Apple, Google, and Amazon all being grilled about anti-competitive practices. The fund reviews the weighting quarterly, which means that if any of these companies begin to falter, this will be reflected in the weighting.
The Invesco QQQ Trust has significantly outperformed other major indexes over different periods. This looks set to continue with people increasingly reliant on technology. The Invesco QQQ Trust may not be suitable to all investors depending on individual risk tolerance. However, it appears to be a compelling investment for those looking to gain exposure to large tech companies while remaining diversified.
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