The Basics of Tracking the Nasdaq With ETFs

Worldwide Invest Better Day 9/25/2012

The Motley Fool has helped ordinary people become better investors for nearly two decades. This month, we're reaching out to millions of investors to help guide them in their quest toward financial knowledge and independence.

Along those lines, I'm planning to take a look at many of the most popular exchange-traded funds in the market today. ETFs have skyrocketed in popularity, but it's important to understand exactly what you're getting when you buy an ETF. Today, I'd like to focus on the fund that harkens back to the 1990s tech boom: the PowerShares QQQ (Nasdaq: QQQ  ) , also known colloquially as the Cubes.

Why buy the Cubes?
The Cubes began trading in 1999, just as the tech boom was close to reaching its zenith. Despite the ensuing bust in 2000 through 2002, the ETF survived, and it remains a powerful force in the ETF world, with more than $35 billion in assets.

The Cubes track the Nasdaq 100 (INDEX: ^NDX  ) , the index of top stocks that trade on the Nasdaq exchange. Because of the Nasdaq's tech focus, the Cubes are widely seen as a barometer of the health of the tech sector. With two-thirds of their assets invested in tech stocks, the Cubes have a far greater allocation to technology than the Dow Jones Industrial Average (INDEX: ^DJI  ) and its corresponding 17% tech representation.

Inside the ETF, you'll find shares of the Nasdaq 100's component stocks, weighted by their market capitalizations. As we saw yesterday with the S&P 500 ETF, Apple (Nasdaq: AAPL  ) plays a huge role in the Cubes: The iDevice giant makes up nearly 20% of the index's value. That figure could rise even further this week after Apple announces its long-awaited iPhone 5. By contrast, Netflix (Nasdaq: NFLX  ) represents only 0.1% of the ETF's assets. That's largely because of Netflix's plunging share price following missteps in breaking apart its DVD business from its streaming-content delivery segment. Continuing trouble hasn't helped the stock, either.

The Cubes don't cost a whole lot to own. You'll pay annual expenses of just $20 for every $10,000 you invest, and although that's more than what you'll pay for most S&P 500 ETFs, it's still much less than the $100 or more that many actively managed mutual funds charge. And although tech stocks have traditionally paid relatively little in dividends, recent increases have boosted the Cubes' yield above the 1% mark, meaning that you can expect to receive more than $100 in dividends every year for every $10,000 you invest.

Learn more
The Cubes give you an easy way to own the entire Nasdaq 100 in a single investment. To learn more about the Cubes, use this link to the ETF's main information page, and be sure to follow the Fool's coverage on the Nasdaq 100 using our My Watchlist feature.

Please stay tuned throughout the month for other informative articles covering a wide range of important topics. Let me also encourage you to take a look at the special website we've set up at On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Take a look at the site now and get on the path to personal prosperity.

Fool contributor Dan Caplinger is waiting for Tesseracts. He doesn't own shares of Cubes or the other companies mentioned in this article, although he does own certain component stocks in the Dow. The Motley Fool owns shares of Netflix and Apple. Motley Fool newsletter services have recommended buying shares of Netflix and Apple, as well as creating a bear put ladder position in Netflix and a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy likes giving you the basics.

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5/27/2016 4:00 PM
QQQ $110.13 Up +0.57 +0.52%
PowerShares QQQ Tr… CAPS Rating: ***
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AAPL $100.35 Down -0.06 -0.06%
Apple CAPS Rating: ****
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Netflix CAPS Rating: ***