As an investor, one of the best and easiest decisions you can make is to buy an index fund.
Owning an index fund that tracks the S&P 500 like the SPDR S&P 500 ETF Trust (SPY 0.95%) does much of the challenging and tedious work of investing for you. It automatically diversifies your portfolio over 500 of the top U.S. large-cap stocks and will adjust it over time, dumping underperforming members and adding ones that have earned their membership in the exclusive club.
S&P 500 ETFs also have few added costs, as the SPDR ETF has an expense ratio of just 0.09%. The Vanguard 500 Fund (VOO 1.00%), which also tracks the S&P 500, has an even lower expense ratio at just 0.03%.
An S&P 500 ETF is such a good investment that even Berkshire Hathaway CEO Warren Buffett has requested that 90% of his wealth be invested in the S&P 500 after he dies, saying, "There's no better bet than America."
While investing in the S&P 500 has historically been a great decision for long-term investors, there's another index fund that has a track record of outperforming the S&P 500 and looks set to continue doing so.
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Meet the Nasdaq 100
Much like the S&P 500, the Nasdaq 100 is made up of the 100 largest non-financial Nasdaq-listed stocks, and it also uses market-cap weighting so the most valuable companies have the greatest influence over the index, just as they do in the S&P 500.
Much of the Nasdaq 100 weighting therefore comes from the Magnificent Seven stocks, including Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta Platforms, and Tesla, and most of its components are tech stocks. There are also significant non-tech components in the Nasdaq 100, including Costco, AstraZeneca, and PepsiCo.
As you might expect, given the performance of its top holdings, the Nasdaq 100 has delivered excellent returns for investors over any reasonable time frame.
Data by YCharts.
The Nasdaq 100 has trounced the S&P 500, even with dividends reinvested, over the past 10 years. For example, $10,000 invested in the Nasdaq 100 a decade ago would be worth about $49,000 today, compared to just just under $30,000 if you had put it in the S&P 500 instead.
A great way to tap into this outperformance is the Invesco Nasdaq 100 ETF (QQQM 1.55%). Like the S&P 500 index funds mentioned above, it has a low expense ratio at 0.15%.
Own the disruptors, not the disrupted
Not only does the Nasdaq 100 have a clear track record of outperforming the broad-market index, but there's also a good explanation for why it's been able to do so.
The success of the top Nasdaq 100 stocks has often come at the expense of companies outside the tech sector, meaning that while tech stocks have surged, sectors like financials, industrials, and energy have at times struggled, victims of the disruption coming out of the tech sector.
For instance, the popularity of the electric vehicles introduced by Tesla and other companies has put pressure on both traditional car manufacturers like Ford and GM, which trade at rock-bottom earnings valuations, and the broader energy sector as well. Energy stocks now trade around value stock territory even though oil prices are high right now, in part because investors take a dim view of their future due to evolving technology like EVs and renewable energy.
Similarly, financials have been impacted by the fast-growing fintech industry, which includes Apple Pay and pure-play options like PayPal. Meanwhile, Amazon has crushed traditional retail stocks like Walmart. Digital media companies like Alphabet, Meta Platforms, and Netflix have generally displaced linear media and entertainment options. Even the struggles in sectors like commercial real estate can be traced to tech companies like Zoom that have made remote work both popular and possible.
With generative AI technologies now showing the potential to be the next major disruption out of the tech sector, it makes sense to own the stocks most likely to be the winners in AI, and those are the Magnificent Seven group that lead the Nasdaq 100.
If you invest in the Invesco Nasdaq 100 ETF, you can own the best of the S&P 500 and ditch the rest, leaving the underperforming sectors behind.
Just like it has over the past decade, the elite tech index looks set to continue outperforming the S&P 500 as it benefits from the disruptive power of technology and innovation.
