There's nothing at all wrong with Invesco QQQ Trust (QQQ 1.54%). In fact, the exchange-traded fund (ETF) does exactly what it is supposed to do. That, however, is the problem, and why most investors probably shouldn't buy it. Here's why this ETF is great, but maybe still not a great investment.
Invesco QQQ Trust is perfect at what it does
Exchange-traded funds are very efficient at what they do, particularly when what they do is track an index. This is basically Invesco QQQ's goal -- track the Nasdaq-100 index, which is simply the 100 largest stocks on the Nasdaq stock exchange. There are expenses involved and other frictions, so the fund's performance can differ from that of the index, but the difference here is pretty minor over time. Since the fund's inception on March 10, 1999, it has an annualized return through the first three quarters of 2023 of 8.95%, versus the index's return of 9.17%. That's pretty darn close.
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As for the fees, Invesco QQQ's expense ratio is 0.2%. While that's higher than the fees of many other ETFs, it is hardly an expensive fund to own. Meanwhile, it is pretty big, with net assets of around $195 billion. That figure, plus the significance of the index the ETF is tracking, suggests there's little risk that Invesco QQQ will suddenly be closed for some reason. Put simply, if you are looking to track the Nasdaq-100, this is a good way to do so.
But that doesn't mean it is a good investment idea for most investors.
The problems with Invesco QQQ Trust
The number one biggest problem with Invesco QQQ Trust is that a small number of stocks make up a large percentage of the fund. That's not the fund's fault, it is simply tracking the index. But you can't ignore this lack of diversification.
The big names are the ones you would expect, including Apple at 10.9% of assets, Microsoft at 10.3%, and Amazon at 5.6%. Add that up and the first three stocks account for roughly 26% of assets.
The list continues with Nvidia at 4.3%, Meta Platforms at 3.8%, Broadcom at 3%, Alphabet class A and B at roughly 3% each (for a total of 6%), Tesla at 2.75%, and rounding out the top 10 Adobe at 2.1%. All in, the top 10 holdings make up roughly 50% of the fund's assets. That's a huge figure for a fund, and it shows an inherent lack of diversification.
To be fair, the fund is market-cap-weighted, so this is to be expected. And this approach is likely to put the fund into the hottest stocks at any given time. But the side effect is a lack of diversification and the risk of increased volatility. When those ten largely tech companies fall out of favor, the Nasdaq 100 is likely to tumble rather quickly. That kind of performance reversal may not be something more conservative investors are ready for.
There's another diversification issue here to consider, and that relates back to the heavy concentration in technology stocks. That's something the Nasdaq is known for, but the Nasdaq-100 is not a technology index and shouldn't be mistaken for one. Invesco QQQ has roughly 57% of assets in technology stocks. The rest gets spread across a broad spectrum of sectors inducing consumer discretionary, healthcare, and consumer staples, among others. Even real estate and utilities show up with tiny fractions of the fund. If you are looking for a tech-specific investment, this is not it. At the same time, if you are looking for a broadly diversified investment, this is not it thanks to the heavy concentration in technology. It is, in the end, kind of an odd beast -- unlike the Dow Jones Industrial Average or the S&P 500, which attempt to mimic the broader economy.
All in, unless you are actually looking to track the 100 largest stocks on the Nasdaq exchange, which is kind of an odd goal, there are probably better index options and ETFs out there.
It was made this way
The interesting thing is that Invesco QQQ is very good at what it does, which is tracking the Nasdaq-100 Index. The problem for most investors, and why it should probably be avoided by all but a select few, is that it tracks the Nasdaq-100 Index, which is quirky at best and highly concentrated in just a few stocks from one sector.
