It's not for nothing that so many legendary stock pickers, including the legendary Warren Buffett, have recommended index funds as the best choice for novice investors. They are, in truth, ready-made portfolios. Thanks to their exposure to the performance of many stocks, they offer much-needed diversification to any investment portfolio.
What's more, it's never been easier for people to invest in an index-tracking exchange-traded fund (ETF). There are many to choose from, but for me, one stands out: the Invesco QQQ Trust (QQQ +0.14%).
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How it works
The Invesco QQQ Trust (also known as the QQQs) is an ETF that tracks the Nasdaq 100 index. That index is made up of the 100 largest stocks that trade on the Nasdaq exchange, with some exceptions. For one, the Nasdaq 100 contains no financial companies. Banks, insurance, and mortgage firms are instead tracked on the Nasdaq Financial 100 index.
The index is market-cap weighted, meaning the largest companies have the largest impact on the price of the index. While tech companies dominate the index, many other sectors, including healthcare, industrials, utilities, consumer staples, consumer discretionary, and energy, are still represented.
| Sector | Number of Stocks (as of 9/30/23) | Percentage of Index (by Market Cap) |
|---|---|---|
| Technology | 36 | 57.1 |
| Consumer Discretionary | 22 | 18.7 |
| Healthcare | 13 | 7.1 |
| Industrials | 10 | 5.5 |
| Telecom | 4 | 4.9 |
| Consumer staples | 6 | 4.2 |
| Utilities | 4 | 1.2 |
| Energy | 3 | 0.7 |
| Real estate | 1 | 0.3 |
| Materials | 1 | 0.3 |
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What makes this ETF such a smart choice?
There are three reasons why the QQQs are such a great investment, particularly for new investors.
First, it's cheap. All ETFs charge an expense ratio -- a fee designed to cover expenses and generate profit for the fund operator. The QQQs have an expense ratio of 0.20%. That compares favorably to the average ETF expense ratio of 0.47%. In other words, investors in the QQQs are paying low fees on their investments.
Second, the fund is no Johnny-come-lately. It's the second-largest ETF in the world by volume -- trailing only the gargantuan SPDR S&P 500 ETF Trust (SPY +0.04%). That's important because it means the fund has plenty of liquidity, meaning investors can trade in and out of shares quickly and efficiently at all times.
Third, the fund is a star performer. Indeed, the QQQs have outperformed the other major index ETFs hands-down since its inception. Consider how the QQQs have performed over the last 10 years compared to some of the other largest stock and bond ETFs:
QQQ Total Return Level data by YCharts
As you can see, it's not even close. The QQQs have grown over 400% -- meaning $1,000 invested in 2014 would have grown to more than $5,000 today.
More to the point, the QQQs are dominated by the so-called Magnificent Seven: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla. Those seven companies make up over 39% of the index. And while there is no telling what the future holds, those are seven fantastic companies -- all of which are growing rapidly and flush with cash.
To sum up, for those with $1,000 to invest, but unsure of how to invest, the QQQs are a great place to start.
