The Invesco QQQ Trust ETF (QQQ -1.24%) is one of the best-known exchange-traded funds (ETFs) in the market. It tracks the Nasdaq-100, which consists of the largest nonfinancial companies on the Nasdaq exchange. Since launching in 1999, QQQ has rewarded long-term investors by crushing the market. That's despite the ETF debuting right ahead of the internet bubble crash.
Since its inception, the ETF is up 1,170% (as of the end of June), while over the past decade it's delivered a more than 445% total return (as of the end of July). The S&P 500 hasn't come close to those types of returns. So, the question is simple: Can QQQ continue to outperform over the next decade?
Heavy on tech, heavy on growth
The QQQ ETF is heavily weighted toward technology stocks. Over 60% of its holdings fall in this category, while another 19% are classified as consumer discretionary. However, even that latter group includes tech-oriented companies like Amazon, Tesla, and Netflix. As such, this is not a broad-based ETF, but instead very much a bet on the growth stocks leading the charge in innovation.
The so-called "Magnificent Seven" stocks hold a very prominent place in the ETF. Nvidia, Microsoft, Apple, Amazon, Alphabet, Meta Platforms, and Tesla together make up nearly 44% of the portfolio. If these companies continue to lead the way, QQQ investors will benefit. However, because the Nasdaq-100 is a market cap-weighted index, if one of these companies starts to fall behind, it will become a smaller part of the fund naturally.
This is one of the big reasons why the QQQ has performed so well over the long term. It lets its winners continue to win and cuts its losers. Most individual investors struggle to do this, including professionals, but that's just the way the Nasdaq-100 and other market cap-weighted indexes have been designed.
Image source: Getty Images.
An AI tailwind
One of the top reasons to own QQQ is that it gives investors exposure to many of the top names in artificial intelligence (AI). With AI looking to be one of the most important technological innovations of this generation, it is a space where you want to be invested.
QQQ's portfolio is invested in all areas of AI. For example, the big three chipmakers of Nvidia, Broadcom, and Advanced Micro Devices that are leading the AI infrastructure build-out represent nearly 17% of its holdings. Meanwhile, the big three cloud computing companies of Amazon, Microsoft, and Alphabet account for nearly 20% of its portfolio. You even get positions in some smaller emerging AI players, like Palantir Technologies and AppLovin.
Importantly, today's top AI companies are all profitable with strong balance sheets. That's very different from the last tech boom in the late 1990s, when the industry leaders were largely unprofitable and burning through cash. Today, AI is being built by companies already throwing off billions of dollars in free cash flow, which reduces a lot of the risk. Meanwhile, if AI lives up to its potential, QQQ investors are set to benefit handsomely.
Dollar-cost averaging is still key
That said, owning QQQ is only part of the story. Equally important is how you invest in it, and on this front, dollar-cost averaging is key. With this strategy, you invest a fixed amount every month or every paycheck on a regular basis. Whether it's $100 or $1,000, the important thing is to stay consistent and not veer from the strategy based on how the market is performing.
Markets will move up and down, and you're never going to time them perfectly. However, dollar-cost averaging takes the guesswork out. From there, you just let compounding do the work.
If you need more convincing, let history be a guide. If you had put $500 a month into QQQ for the past 30 years, with returns near its past-decade average, your investment would be worth several million dollars today.
The hard part, of course, is sticking with this strategy during downturns. At one point, the QQQ lost more than 80% of its value after the dot-com bubble, but investors who kept buying at that time are in great shape now. That is a lesson worth remembering.
So, is QQQ the right ETF for the next decade? For long-term investors who want exposure to the biggest names in technology and the companies leading the AI revolution, the answer is yes.
