The smartest investors know that a great way to get broad market exposure is to buy exchange-traded funds (ETFs). On the technology front, the Nasdaq 100 is a frequently favored index. Which is why Invesco QQQ Trust (QQQ 1.54%) is an ETF you might want to look at. Just make sure you know these three things before you buy it.
1. The Nasdaq 100 isn't all technology
The Nasdaq 100 is called the Nasdaq 100 because it is an index of 100 of the largest non-financial stocks that trade on the Nasdaq exchange. Historically, this exchange had been a favorite listing choice for smaller technology companies. Many of those companies are no longer small, so the index has a heavy exposure to technology. That leads some investors to think of the Nasdaq 100 as strictly a tech index. It isn't.
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Although technology stocks do account for about 57% of the value of the Invesco QQQ Trust portfolio, that leaves around 43% of its value in other sectors. For example, consumer discretionary stocks make up nearly 19% of its value. Healthcare chimes in at 7%. Telecom and industrials are both roughly 5%. There's even a bit of utility exposure in the mix (a tiny 1% or so). So smart investors will understand that the Invesco QQQ Trust is a technology-heavy ETF, but not a pure-play technology ETF.
2. Invesco QQQ Trust isn't exactly cheap
Sticking to big-picture issues before digging in a little deeper, Invesco QQQ Trust's expense ratio is 0.2%. Compared to most actively managed mutual funds, that makes it a fairly low-cost fund. But when you weigh that 0.2% against what some other ETFs charge, well, it isn't quite as attractive anymore.
For example, the SPDR S&P 500 ETF Trust (SPY 0.95%) has an expense ratio of just 0.0945%. Meanwhile, Technology Select Sector SPDR Fund (XLK 1.13%) and Vanguard Information Technology ETF (VGT 1.72%) both have expense ratios of 0.1%. In other words, you could get a fund with broad market exposure or even technology exposure for about half the cost.
3. Invesco QQQ Trust carries some concentration risk
As noted above, Invesco QQQ Trust has a lot of technology exposure. That's a concentration risk, but you are likely seeking out precisely that sort of concentrated exposure if you are buying this ETF. However, if you dig into the portfolio a little bit, you'll spot another concentration risk that's worth paying attention to.
Apple (AAPL -0.35%) accounts for roughly 11% of the portfolio's value. Microsoft (MSFT 1.82%) makes up nearly 10%. The two share classes of Alphabet (GOOG 9.96%) (GOOGL 10.22%) total about 6.5%. And Amazon (AMZN 3.43%) is roughly 5%. Add all of that up and just four companies account for about a third of the portfolio. That's a lot of exposure to a handful of stocks that all happen to reside in the same sector.
These four companies also fall into what has been dubbed the "Magnificent Seven." That group of stocks has been the driving force behind much of the broad market's overall performance of late. Smart investors recognize that when investor sentiment turns negative on these stocks, the Invesco QQQ Trust is likely to fall on hard times.
A quick and dirty tool, but not a perfect one
At the end of the day, Invesco QQQ Trust is a quick way to get exposure to the top stocks in the Nasdaq 100. While that will mean material exposure to technology stocks, it is not a pure-play technology offering. It is also not the cheapest way to get exposure to technology stocks, nor even a broad market index, as other ETFs offer notably lower expenses. But the biggest issue, which you may view positively or negatively, is that a tiny group of high-profile stocks accounts for a significant portion of the portfolio's value. While that's a positive when those stocks are in favor, it could quickly turn into a negative. Basically, you should make sure you understand what you'd be owning before you buy this concentrated ETF.
