The Invesco QQQ Trust (QQQ 0.67%) is highly successful at what it aims to achieve. But that's also a potential problem for investors.
This relatively simple exchange-traded fund (ETF) needs to be carefully considered before you make it a core holding in your portfolio. Here are the details that will likely be most important for you to consider.
What does the Invesco QQQ Trust do?
The Invesco QQQ Trust is an index-tracking ETF. So, technically, it just buys whatever its index buys. The real concern is what the index does.
In this case, the index is the Nasdaq 100 index. It is a fairly simple index that buys the 100 largest nonfinancial stocks that trade on the Nasdaq exchange. The stocks are market-cap weighted, so the largest companies have the biggest impact on performance.
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One interesting fact here is that the Invesco QQQ Trust's expense ratio is on the high side for an index ETF, at 0.20%. By comparison, some of the most popular S&P 500 index-tracking ETFs come with much lower expense ratios.
To put some numbers on that, the expense ratio is 0.09% for the SPDR S&P 500 ETF and 0.03% for the Vanguard S&P 500 ETF. Even a technology-focused ETF like The Technology Select Sector SPDR Fund has an expense ratio of just 0.08%.
That last comparison, however, highlights the complexity of the Nasdaq 100. Because that index tracks the 100 largest nonfinancial companies on the Nasdaq exchange, that isn't directly focusing the ETF on technology stocks. But the Nasdaq exchange happens to be home to a lot of the most important technology companies.
The Invesco fund's portfolio mix is biased
While the S&P 500 index will provide you with a fairly well-diversified portfolio, the Nasdaq 100 leaves you heavily weighted toward tech. For comparison, the S&P 500's technology weighting is around 34%, while tech makes up nearly 61% of the Invesco QQQ Trust's portfolio. That's a very big difference.
Worse, the top 10 holdings in the Invesco QQQ Trust account for nearly 53% of the portfolio's assets. And all 10 are either technology stocks or are very closely tied to the tech sector. The top 10 of the S&P 500 are also tech heavy, but the list is only about 38% of the portfolio. Again, that's a big difference.
The Invesco QQQ Trust is not a bad ETF. In fact, it does exactly what it sets out to do. But that goal leads to a lack of diversification in the portfolio. And, in turn, that can result in higher volatility, since tech stocks have a history of swinging between being in favor and out of favor with investors.
However, being concentrated in technology has been a performance benefit in recent years. As the chart above highlights, the Invesco QQQ Trust has easily outdistanced the Vanguard S&P 500 ETF over the past decade. But it has done that with more volatility along the way, which is important to keep in mind when considering it as a portfolio holding.
Should the Invesco QQQ Trust be a core holding?
For most investors, the Invesco fund probably won't make a great core holding. It simply doesn't have enough diversification to be the foundation of your portfolio.
That said, if you are looking to add a technology-heavy ETF to the mix, it could be a good complement to a more diversified ETF. And it could even be a long-term holding, as long as you go in with an understanding that the Invesco QQQ Trust has a fairly concentrated and technology-heavy portfolio.
