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The New Way to Own the Nasdaq's Hottest Stocks

By Dan Caplinger – Oct 14, 2020 at 12:01PM

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Find out about an interesting alternative to older choices.

The stock market was relatively quiet on Wednesday, taking a break from recent volatility to gather itself. The Nasdaq Composite (^IXIC -0.18%) has been on fire lately, and it still managed to push slightly higher Wednesday morning. As of 11:15 a.m., the index was up just under 0.2%. With those gains, the benchmark rests only about 1.5% below its all-time record level. That reveals how quickly the Nasdaq has bounced back from its September swoon.

Many investors have bemoaned the fact that the Nasdaq is dominated by the massive tech companies that together have a huge amount of influence on the market-capitalization-weighted indexes. That hasn't stopped the Invesco QQQ Trust (QQQ -0.40%) from becoming one of the most popular exchange-traded funds in the market. However, Invesco came out earlier this week with some alternatives to the QQQ that could give investors more of what they want. One brand-new ETF focuses on stocks that most Nasdaq-tracking funds miss.

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Image source: Getty Images.

Going beyond the Nasdaq-100

The success of the QQQ comes from the fact that the big-name stocks in the Nasdaq-100 Index have done particularly well. However, with more than 60% of the weightings in the Nasdaq-100 going to just its top dozen stocks, it's hard to see the QQQ as a way to bet on the innovative power of up-and-coming companies whose shares trade on the Nasdaq Stock Market.

Instead, many Nasdaq investors have focused their attention on popular stocks that don't have trillion-dollar market caps. In particular, the software-as-a-service and digital transformation arenas have been rich resources for investors to find hot growth stocks with great long-term future prospects.

In order to give index investors a way to adopt that theme, Invesco came out with the Nasdaq Next Gen 100 ETF (QQQJ 0.28%). As the fund manager describes it, the idea of the fund is to track an index of "mid-cap Nasdaq innovators." That includes many of those high-flying investor favorites.

Stretching definitions

To be clear, we're not really just talking about mid-cap stocks by the typical definition. That makes sense, because innovative Nasdaq stocks have had their share prices bid up significantly during the bull market since March 2020. That's pushed many companies well into the traditional large-cap category even though their businesses still have plenty of room left to expand.

Instead, the Next Gen ETF focuses on the companies that rank 101 to 200 on the scale by which the Nasdaq-100 picks its component stocks. Invesco notes that these up-and-comers "may have potential to one day join the Nasdaq-100."

In the Invesco Nasdaq Next Gen ETF, you'll find plenty of well-known names:

  • Shares of online security specialist Okta (OKTA -3.48%) have more than doubled this year, as companies moving to the cloud have found they need top-of-the-line protection against threats in order to ensure the safety of their business operations.
  • Programmatic advertising specialist The Trade Desk (TTD 4.97%) has enjoyed an even bigger rise of nearly 160% so far in 2020. The advantages of the company's targeted platform approach to ads have shown through even in a tough environment for advertising in general.
  • Streaming TV facilitator Roku (ROKU 1.59%) has taken advantage of the trend toward in-home entertainment, with a 75% rise in its stock this year.

These are just a handful of the promising companies in the index. Almost half of the fund is invested in tech, with healthcare, communication services, and consumer stocks getting nearly all of the remainder.

Let the battle begin

Going forward, it'll be interesting to see whether the Next Gen 100 fund outperforms its more established Nasdaq-100 tracking sibling. With Invesco covering the entire fund family, though, investors have a definite focal point to hone in on as they look at investing more heavily in Nasdaq stocks.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Okta, Roku, and The Trade Desk. The Motley Fool has a disclosure policy.

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