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

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.

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Comments from our Foolish Readers

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  • Report this Comment On August 19, 2014, at 10:42 AM, TradeWithPat wrote:

    I think Selena does a great job of explaining the components of the QQQ as well as weighing out the pros and cons of the index. I do think there is one thing that was left out that should be mentioned...the price level of the ETF.

    As of the publication date of this article the QQQ was trading at an all-time high of $98/share. Over the past year the ETF has gained over 30%. I would caution anyone thinking about going long a stock that has had a parabolic move.

    I would be more inclined to buy a vertical put spread in the September option expiration cycle to take advantage of the price extreme and low volatility.

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Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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