The Invesco QQQ Trust (QQQ 0.13%) is one of the largest growth-focused exchange-traded funds (ETFs) in the world -- with a staggering $360.6 billion in net assets.
By mirroring the performance of the Nasdaq-100, the Invesco fund has outperformed the S&P 500 over the last year, three years, five years, and 10 years. However, the Invesco QQQ has a glaring flaw by leaving out some critical growth stocks.
Here's what investors must consider when buying the Invesco QQQ Trust, and why the fund's error is corrected by growth ETFs that don't mirror an index.
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Limitations of index-focused funds
The Nasdaq-100 is made up of the 100 largest non-financial companies listed on the Nasdaq Stock Exchange. This exchange was the first to allow online trading, attracting technology-focused companies. The New York Stock Exchange (NYSE), meanwhile, represented older, more established companies.
Many of today's top growth companies are listed on the Nasdaq, including nine out of the "Ten Titans" stocks -- Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta Platforms, Broadcom, Tesla, and Netflix.
Missing is Oracle, which is listed on the NYSE. Oracle has transformed into an enterprise solutions juggernaut -- with a rapidly growing cloud business in addition to its roots in database management.
Additionally, one of the fastest-growing companies in the healthcare sector, and the largest healthcare company by market cap, Eli Lilly (NYSE: LLY), is listed on the NYSE.
Eli Lilly has sold off this year, but it still sports a market cap of $638 billion. There are sound arguments for why Eli Lilly's existing portfolio of weight management drugs and pipeline of drugs under development could pole-vault its market cap past $2 trillion.
Salesforce is investing heavily in agentic artificial intelligence (AI) to improve user efficiency across its customer relationship management software suite. And cloud-based digital workflow services company ServiceNow is expanding its AI tools as it continues to maintain rapid sales and free-cash-flow growth.
Oracle, Eli Lilly, Salesforce, and ServiceNow are the exact kinds of megacap growth stocks that should be in a growth-focused ETF. And yet, the Invesco QQQ doesn't include them because they are on the NYSE.
In addition to some glaring omissions, some companies are in the Invesco QQQ Trust simply because they are listed on the Nasdaq, not because they are growing quickly -- such as consumer staples like PepsiCo, Mondelez International, Keurig Dr Pepper, Kraft Heinz, and industrial giant Honeywell International. While Honeywell is a great value and pays a reliable dividend, it may not be what some investors are going for when targeting higher-octane growth stocks.
By limiting its holdings to stocks that are traded on the Nasdaq exchange, the Invesco QQQ misses out on some key growth stocks -- namely Oracle and Eli Lilly -- and includes large-cap value stocks listed on the Nasdaq exchange.
Alternatives to the Invesco QQQ
Another downside of the Invesco QQQ is its expense ratio of 0.2%. The fund has been around since 1999, making it a veteran in the ETF space. And not long ago, 0.2% would have seemed like a steal. But in today's era of ultra-low-cost ETFs, investors can find more inclusive products with growth stocks from both the Nasdaq and the NYSE and lower fees.
Investment management firm Vanguard has a number of low-cost ETFs that fit this mold, such as the Vanguard Growth ETF (VUG 0.18%), which has an expense ratio of just 0.04% and is similar in size to the Invesco QQQ by net assets.
The Vanguard S&P 500 Growth ETF (VOOG -0.01%) includes all the Ten Titans growth stocks and fewer holdings than the Vanguard Growth ETF, making it an even more concentrated way to invest in the megacap names.
The Vanguard Mega Cap Growth ETF (MGK -0.02%) takes the concentration a step further with even fewer holdings and massive weightings in the largest companies. Over half of the fund is in just five stocks -- Nvidia, Microsoft, Apple, Alphabet, and Amazon.
Room for improvement
The Invesco QQQ has been a pioneering product in the ETF landscape, providing investors with broad-based exposure to growth stocks.
However, there are better options available for investors seeking to allocate new capital to growth-focused ETFs.
