If you're like a large number of other investors, sitting on a stake in the Invesco QQQ Trust (QQQ 1.49%) is a little bit intimidating. While exchange-traded funds are supposed to be less volatile and inherently diversified, the so-called QQQs often feel like they're anything but. Not only are they made top-heavy by significant exposure to Nasdaq-listed behemoths like Apple and Microsoft, the Invesco QQQ Trust is overconcentrated with technology stocks.
But if there were ever a poorly balanced fund you'd want to step into, this one's it.
Above-average risk that's worth the reward
The Nasdaq 100 Index the QQQs are based upon may boast 100 different constituents. Its top 10 holdings, however, account for more than half of the index's value. Arguably worse, Invesco suggests that nearly half of the fund's holdings are considered technology stocks. The next-nearest sector exposures are telecom and discretionary names, accounting for about 19% and 17% (respectively) of the index's makeup. That's not exactly a healthy balance either. All of these factors make the QQQs seem oddly erratic for an index-based fund.
But if you're looking for high growth in an easy-to-own package, you may just want to accept that volatility as part of the QQQ ownership experience.
The graphic below puts things in perspective. Since the dot-com crash of 2000 finally ran its course and gave way to a rebound beginning in mid-2002, the Invesco QQQ Trust has outperformed the S&P 500 by a factor of roughly four to one.
In-the-know investors will rightfully point out that Amazon and Apple are responsible for the lion's share of this growth, with help from the technology sector in general. Tech stocks are up nearly three times as much as the S&P 500 for the time frame in question. Amazon shares are up nearly 20,000% in this period, while Apple shares have rallied by almost 80,000% during this 20-year stretch. It seems unlikely either stock will be able to repeat their respective feats.
Don't dismiss the possibility of another Nasdaq 100 name going on a comparable tear, however. Take Tesla (TSLA 1.85%): Although the stock currently sits more than 1,000% higher than where it was just a couple of years ago now that it's successfully mainstreamed electric vehicles, the surface of the EV industry itself has only been scratched. The U.S. Energy Information Administration estimates there are only about 10 million electric vehicles on the world's roads right now but believes that figure will swell to more than 670 million battery-powered vehicles by 2050. As the leading brand in the EV business, Tesla is well positioned to benefit from most of that growth.
Image source: Getty Images.
Nvidia (NVDA 3.65%) is another mostly overlooked Nasdaq 100 name that could turn into a monster-sized winner. While a well-respected brand within the world of video gaming, it's not often seen as much else. That's a big mistake.
Nvidia's technology used in its graphics cards is ideally suited to power artificial intelligence applications. That's why the company repurposed this tech to create its DGX systems, built from the ground up with AI in mind. It matters simply because tech market research outfit IDC believes global spending on artificial intelligence solutions will grow from $342 billion this year to more than $500 billion as soon as 2024. That's more than $160 billion of new revenue up for grabs, even a fraction of which would be a huge deal for Nvidia, which is only on pace to do about $27 billion worth of business this year.
An easy way to plug into all the best-of tech stocks
The obvious challenge is, you don't know which of the Nasdaq's biggest 100 companies are going to hit Apple- or Amazon-like home runs. Nvidia or Tesla might do it, or perhaps there's a dark horse in the mix nobody expects big things from. That's the whole point of owning a piece of all of them -- or several of them -- via a fund: You don't have to know. You can simply plug into the best bits of this ilk, which somehow the Nasdaq exchange has done a better job of garnering than the New York Stock Exchange has.
To be clear, none of this is to suggest you should limit your holdings to just Nasdaq-listed technology names. Common-sense rules about diversifying your portfolio still apply. You probably want to own some small caps and some value-oriented tickers as well.
Rather, it's simply to point out the Invesco QQQ Trust is an easy way to gain exposure to most of the market's highest-growth and highest-potential names. Better still, the market itself will take care of any swap-outs or replacements that need to happen. Nasdaq (NDAQ -0.18%) itself regularly updates these 100 constituents as needed. Your only task is to remain patient enough to let time do most of the heavy lifting you want done.
