Although there has been heightened volatility recently, the Invesco QQQ Trust (QQQ +0.46%) has been a strong performer, producing a fantastic total return of 111% in the past five years (as of July 2). The market is clearly enamored with innovative businesses that benefit from various secular trends, which can lead to outsize growth potential in the future.
Should you buy this exchange-traded fund (ETF) while technology stocks are still near all-time highs? Here's how investors should view this situation.
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Listen to the bear case
After such a phenomenal performance, there are very real fears that the Invesco QQQ Trust is expensive. The weighted-average price-to-earnings ratio of the ETF is 36.5. That's certainly not cheap, as it reflects the market's high expectations. All else equal, a higher starting valuation reduces upside potential and raises the downside. Companies must execute extremely well with less room for error.
Another critique rests fully on the artificial intelligence (AI) trade. Besides Apple, four of the QQQ's top five positions, Nvidia, Micron, Microsoft, and Amazon, are heavily involved in or exposed to the AI spending boom, an exciting but unproven technology.
The return on all this investment is a big unknown variable. It's arguably the most important topic that the market and economy face today.
If the payoff is a disappointment, it could create a ripple shock that hits the valuations of all these stocks. This would drag down the entire ETF.
NASDAQ: QQQ
Key Data Points
A longer time horizon solves the problem
You might be worried about the QQQ's valuation leading to a potential AI bubble bursting. This high-profile concern is valid. However, no one knows for sure whether it will cause any pain in the near term. If it does lead to declining stock prices, the timing is also a big question mark.
The best investors avoid this guessing game. The only way to simultaneously be willing to accept the bear case, while still believing in the QQQ's bull thesis -- that AI and other technological trends will result in higher earnings power in the future for these companies -- is to simply extend your time horizon. Being optimistic about the next decade and beyond, but being patient and disciplined with your mental approach, is perhaps the biggest competitive advantage any individual investor can obtain.
Instead of making a single investment into the Invesco QQQ Trust, consider deploying a dollar-cost averaging strategy. Adding fresh savings to this ETF every month completely eliminates the need to correctly time the market.
