The Invesco QQQ Trust (QQQ +1.31%) does exactly what it is meant to do and does it fairly well. But that's not the yardstick that investors need to use when evaluating this exchange-traded fund (ETF). The bigger question is whether or not the Invesco QQQ Trust adds any value to your overall portfolio. And the ETF's strong performance over the past year is not enough to make it a buy. Here's what you need to know.
What does the Invesco QQQ Trust do?
The Invesco QQQ Trust is an index-based exchange-traded fund. That basically means it tracks an index in rote fashion. Whatever gets into the index is what's going to be in the ETF. So the real question here is: What index does the Invesco QQQ Trust follow? That index is the Nasdaq 100.
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The design of the Nasdaq 100 is pretty simple. It is comprised of the 100 largest non-financial stocks that trade on the Nasdaq stock exchange. The index is market-cap weighted, so the largest companies that make the top 100 have the heaviest weighting in the index. That's basically all the important information you need to know to understand the Invesco QQQ Trust.
What role does the Invesco QQQ Trust fulfill in a portfolio?
This is where things start to get interesting. The Nasdaq exchange has historically been a favorite listing place for technology companies. So some investors might look at the Invesco QQQ Trust as a technology fund. Given that the top five holdings in the fund are Microsoft (MSFT +0.60%), Apple (AAPL +2.59%), Nvidia (NVDA +1.67%), Amazon (AMZN +0.26%), and Broadcom (AVGO +2.02%), that's not an unreasonable assumption. Together, these five stocks account for roughly a third of the fund's assets.
NASDAQ: QQQ
Key Data Points
In fact, the only stock that's very clearly not technology-related in the trust's top 10 holdings is retailer Costco (COST +1.26%), which comes in at No. 9. No. 10 on the list is Tesla (TSLA +2.96%), which is an automaker, but the company is probably best viewed as tech-adjacent. Overall, technology makes up around 60% of the Invesco QQQ Trust's portfolio.
But 60% isn't 100%, so this isn't a technology ETF and shouldn't really be thought of as such. It just has material technology exposure. It also has exposure to consumer discretionary stocks (roughly 18% of assets), healthcare (6% or so), industrials (nearly 5%), telecom (about 4%), and consumer staples (nearly 4%). There are a few stragglers that make up less than 2% of the ETF, including basic materials, utilities, energy, and real estate.
Those other sectors, while adding diversification to the portfolio, complicate the story in a big way. If you are looking to buy the Invesco QQQ Trust, you need to consider how it will interact with the rest of your portfolio -- and the answer is most likely to be "not very well."
In fairness, the ETF has outperformed the S&P 500 Index over the past year, largely thanks to its heavy technology weighting, but past performance is no guarantee of future performance. And even with the recent strong showing, if you look back over a longer period, the tech exposure has resulted in more volatile performance and, usually, deeper drawdowns. If you got in for the upside, will you be able to stick around through the downside? An investment isn't long-term if you can't stomach owning it through an entire market cycle.
Then there's the question of what you will own in the future if technology stocks stumble and the makeup of the top 100 stocks on the Nasdaq shifts. There's no logic to the selection process other than the stocks being large, so anything (other than financial stocks) can end up in the Invesco QQQ Trust. Thus, there's no real way to know what this ETF could become over time and how that will, in turn, affect your portfolio.
There are better options
At the end of the day, the Invesco QQQ Trust is a lot more complicated than it seems, precisely because of the overly simplistic construction of the Nasdaq 100 Index that it follows. If you want technology exposure, you should probably buy a technology-focused ETF. If you want a diversified and broad-based portfolio, you should buy an ETF that tracks an index that is constructed to achieve that end. An S&P 500 tracking ETF would be a solid starting point.
