The current environment in the banking industry has left a lot of investors concerned and confused. Bank stocks generally do well when interest rates are rising, particularly when the economy is not in a recession. But these are not typical times.
In recent weeks, three banks -- SVB Financial's Silicon Valley Bank, Signature Bank, and Silvergate Capital -- have failed or collapsed. And while they are small- to mid-size niche banks that focus on venture capital and/or cryptocurrency, their woes have brought down larger, sturdier bank stocks throughout the industry as investors shunned the space.
While many banks, particularly the larger ones, will bounce back, investors who are looking to avoid banks during this period of volatility might want to consider a high-performing exchange-traded fund (ETF) that does just that: the Invesco QQQ Trust (QQQ 0.25%).
No banks allowed
The Invesco QQQ is not only one of the largest and most popular ETFs in the world, it is also one of the best-performing over almost any time frame. And since it tracks the Nasdaq-100 index, it doesn't invest in any financial stocks, including banks. That's because the Nasdaq-100 index gauges the performance of the 100 largest stocks on the Nasdaq Stock Exchange, excluding those in the financial sector.
Now, it does have much greater exposure to technology stocks; roughly 49% of the portfolio is invested in information technology companies, while approximately 17% is in communication services. While those sectors have seen their share of volatility over the past 18 months, valuations have come way down and they have bounced back in 2023. Currently, its three largest holdings are Microsoft, Apple, and Amazon.
The Invesco QQQ is up about 16% year to date. Over the past year, it is down 12.2%, reflecting a 33% decline in calendar year 2022. But when you pull back the lens, the QQQ has excellent long-term returns. Over the past five years, it has an average annual return of 14.3%, while its 10-year annualized return is 16.2%.
Due to last year's massive sell-off of tech stocks, the price-to-earnings ratio for the Nasdaq-100 that the ETF is based on has come down to about 21, which is lower than its 23 P/E ratio at the end of 2022, and down from 38 at the end of 2021. A relatively low P/E ratio means the Nasdaq-100 (and its corresponding ETF) should have some room to run. There could be some more volatility for the technology sector in the near term, but if interest rates start to drop later this year as some economists expect, that will be good news for the sector -- and the ETF.
A staple of a diversified portfolio
The Invesco QQQ should certainly be considered as part of a diversified portfolio, filling that aggressive growth box. It gives you access to all of the biggest and best technology stocks without having to invest in them individually. It also gives them greater weight than, say, an S&P 500 ETF would, which means extra alpha in bull markets, but greater volatility in choppy markets, like we saw last year. But over time, as the returns show, it generates long-term gains that are among the best you can find.
And while bank stocks are volatile right now, there are some really good values available to investors, particularly among the large banks -- namely, those that were highly regulated after the Great Recession and must adhere to strict liquidity guidelines and pass stress tests. So while caution is encouraged, keep an eye out for good deals in that industry.
