Is It Time to Buy the PowerShares QQQ ETF (QQQ)?

It's hard to argue against a basket of powerful, growing technology stocks.

Aug 18, 2014 at 7:15PM

Photo: Flickr user Dean Johnson.

If you don't have the time or expertise to carefully select individual stocks to invest in, you'd do well to consider investing in exchange-traded funds (ETFs). They're built like mutual funds, but they trade like stocks, and many charge lower fees than regular mutual funds. That's especially true of ETFs that track indexes. A great example to consider for your portfolio is the PowerShares QQQ ETF (NASDAQ:QQQ).

A major index

The PowerShares QQQ ETF tracks the Nasdaq 100 Index, which is made up of 100 of the biggest stocks in the Nasdaq Stock Market based on market capitalization. It includes U.S. and international companies but excludes the financial industry and a few others. It's technology-heavy, featuring industries such as telecommunications, retail, biotechnology, and computer hardware and software.

It's worth noting that with indexes that are weighted by market capitalization, heavyweight companies will have an outsize influence. Indeed, in this index, the top 10 holdings make up roughly half of the index's total value. Apple alone, with its market cap approaching $600 billion, recently made up more than 13% of its value.

Compelling components

So what are these component companies? Here are the top 10, in descending order of market cap:

  1. Apple
  2. Microsoft
  3. Google (Class C shares)
  4. Intel
  5. Google (Class A shares)
  7. Gilead Sciences
  8. Facebook
  9. Qualcomm
  10. Cisco Systems

The ETF in context

Compared to many other major technology-focused ETFs, such as the iShares US Technology ETF (IYW), the PowerShares QQQ ETF is bigger, charges less in fees, and has a more impressive performance record.

It's more growth-oriented, too, with few value stocks among its holdings. Information Technology (IT) stocks make up more than 50% of its value, leaving less room for industries such as health care, telecommunication services, and consumer staples. Not only does it exclude financial companies, but it also holds no stocks in the energy, utilities, or real-estate industries. And though it holds both domestic and international stocks, it's really a domestic ETF, with U.S. companies comprising 97% of its holdings.

Why you might buy the PowerShares QQQ ETF

There are plenty of reasons to invest in the PowerShares QQQ ETF. For one thing, its fees are low: Its expense ratio (annual fee) is just 0.2%. Better still, its performance in past years has been exceptional. It did take a bigger hit than the S&P 500 in 2008, falling 42% versus the blue-chip index's 37% drop. But over the past three, five, and 10 years, it outperformed the S&P 500, averaging annual gains of 23%, 21%, and 12.5%, respectively.

More importantly, the future is bright for technology-heavy companies. For example, researchers at Gartner have estimated that global IT spending will rise from $3.7 trillion in 2014 o $4.3 trillion in 2018. And with healthcare companies making up 14% of the ETF's assets, it's promising that the Centers for Medicare and Medicaid Services estimate that healthcare spending will double to $5 trillion between 2009 and 2022.

When not to buy the PowerShares QQQ ETF

There are reasons not to buy this ETF, however. For example, if you want an even broader index -- one that includes financial companies -- then this investment is not for you. Note, too, that being an index composed of stocks in the Nasdaq market, the Nasdaq 100 excludes lots of technology giants that trade on the New York Stock Exchange, such as IBM, EMC, and Corning. If you want to collect some fat dividends, it's not a great buy, either, as many tech companies are too focused on reinvesting in their growth to pay dividends at this point.

Perhaps the best reason to pass up this otherwise solid ETF is its market-cap-based weighting, which gives much more influence to some companies than others. If you're not a strong believer in Apple's future, for example, you may not want more than 13% of your money in this ETF tied up in it. If you agree that equal weighting makes more sense in indexes, consider the First Trust NASDAQ-100 Equal Weighted ETF (NASDAQ:QQEW), an ETF with the same stock focus as the PowerShares ETF that's also compelling in terms of fees and performance. It charges a bit more in fees, but it will give all its holdings an equal shot at boosting the value of the index.

However you do it, investing in America's robust and growing technology stocks makes a lot of sense.

Speaking of technology stocks, here's a potential big winner
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of, Apple, Corning, Gilead Sciences, Google (C shares), Intel, Microsoft, and Qualcomm. The Motley Fool recommends, Apple, Cisco Systems, Corning, Facebook, Gilead Sciences, Google (A shares), Google (C shares), and Intel. The Motley Fool owns shares of, Apple, Corning, EMC, Facebook, Gilead Sciences, Google (A shares), Google (C shares), Intel, International Business Machines, Microsoft, and Qualcomm. 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 Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information