The Nasdaq Index has soared this year as tech stocks stage a rebound. We find out what are the pros and cons of the QQQ ETF as a way to gain exposure to tech stocks like Apple, Tesla, Meta and Nvidia.
As we enter the last quarter of 2023, investors in the US stock market are looking at fairly healthy gains year-to-date.
The broad-based S&P 500 index rose by about 13% from January to September this year, as the US economy has proven to be more resilient than expected.
Investors in US tech stocks have seen even more significant gains, with the Nasdaq 100 index up by 35% year-to-date.
This would mean that the Nasdaq 100 index has regained most of its losses in 2022, and is now less than 10% shy of its 2021 highs.
As a result, many investors have asked us – how do we get exposure to the Nasdaq 100 index? Is the Invesco QQQ ETF a good proxy to tech stocks?
Let us dive deeper to understand more about the Invesco QQQ ETF.
What is the Invesco QQQ ETF?
Invesco QQQ ETF (QQQ) is an Exchange-traded fund (ETF) established in 1999 that aims to track the NASDAQ 100 index. The index consists of the 100 largest non-financial companies listed on the Nasdaq.
Currently the 5th biggest ETF by assets in the world, it has grown rapidly over the past decade because of its long history (it dates back 24 years!) and strong historical returns.
QQQ ETF Quick Facts
|SEC 30 Day Yield||0.63%|
|Total Expense Ratio||0.2%|
|Short Selling Enabled||Yes|
|Source: Invesco as of 30 June 2023|
What are the constituents of the QQQ ETF?
Together, the 10 stocks form about 49% of the index, clearly demonstrating the skew of the index towards the largest companies.
It delivers diversified exposure to companies that are at the forefront of transformative, long-term themes such as augmented reality, cloud computing, mobile payments and more.
But it’s more than a being just a “tech ETF”, it also consists of companies for sectors such as consumer discretionary, healthcare, telecommunications and even utilities.
Further down the constituent list, you’ll find companies like Starbucks and Lululemon in the index too.
What investors may like about the QQQ ETF
#1 - Growth potential
The selection criteria for the NASDAQ 100 are skewed towards industry leaders with robust growth profiles, particularly within the technology sectors shaping our future.
Over the past decade, QQQ has generated an impressive cumulative return of 420%. This would represent an annualised return of about 18%.
To put this into perspective, a $10,000 investment 10 years ago would have grown to more than $50,000 today.
While past returns do not represent the future, it’s clear that the technology boom over the past decade has delivered spectacular performance for the QQQ ETF.
When compared against a ETF tracking the S&P 500 index such as the VOO ETF, the QQQ ETF has generated higher returns historically as well.
Over the past 5 years, the QQQ ETF has generated cumulative returns of 112%, above the returns on the VOO ETF.
#2 - Low cost and diversified exposure
With a total expense ratio of just 0.2% per year, QQQ is extremely cheap to own.
When adopting a dollar-cost average (DCA) approach through a regular savings plan, the use of a low-cost ETF may allow us to enjoy higher net returns over time compared to an instrument with higher-fees.
QQQ also provides an all-in-one basket for gaining exposure to large-cap technology, communication, and consumer discretionary businesses without researching and selecting securities individually which makes an investing a breeze for those with little time.
#3 - Deep liquidity
QQQ is among one of the most liquid ETFs traded - with about ~50M shares being traded every day on average in the past 3 months.
The bid-ask spread for QQQ is typically very low at 0.01%, and short-term investors including day traders, would really appreciate its liquidity even at larger sizes.
Shorter term investors may also capitalize on QQQ’s momentum when other investors pile into thriving growth stories within its top holdings such as NVIDIA.
|Symbol||Name||AUM ($ bn)||Average 3 month daily share volume (million)|
|SPY||SPDR S&P 500 ETF||411||75.4|
|IVV||iShares Core S&P 500 ETF||349||4.0|
|VOO||Vanguard S&P 500 ETF||338||3.9|
|VTI||Vanguard Total Stock Market ETF||316||2.9|
|QQQ||Invesco QQQ Trust Series I||204||51.4|
What investors may not like about investing in the QQQ ETF
#1 - Concentration risk
We mentioned earlier that QQQ's top 10 holdings make up approximately half of total fund assets. The largest, Apple, accounts for almost ~11% by itself.
Any pullback in performance in any of the 10 largest companies would result in a performance hit relative to the broader market index.
For example, if Apple were to release a disappointing quarterly earnings report or there would be a supply chain disruption affecting the deliveries of Apple products to consumers, you can expect a significant fall in value of the ETF even if other companies are completely unaffected.
#2 - High volatility
QQQ also frequently experiences large swings in its value with many more big daily, monthly, and annual moves compared to other ETFs.
Historically, the QQQ ETF has also seen drawdowns as large as 32% for as long as 12 months.
For investors not used to large daily moves or short-term drawdowns, it may mean potentially selling when the price of the ETF is depressed.
What would Beansprout do?
For investors seeking long-term growth potential through industry-leading companies, QQQ offers a low-cost, diversified exposure to a basket of technology and media companies.
Traders looking to participate in the US market have also been using the QQQ ETF as a short-term trading instrument because of its excellent liquidity.
The QQQ ETF has generated higher returns historically compared to an ETF benchmarked to the S&P 500 index, but it could also present higher risks because of its volatility.
In addition, its concentration towards the technology sector may pose a risk to portfolios that are already heavily concentrated towards growth stocks.
In summary, the QQQ ETF is a worthy consideration in a diversified portfolio for those that can stomach the volatility.
How to buy the QQQ ETF as an investor?
Investors can purchase the QQQ ETF through any brokerage firm with NASDAQ as a trading venue, such as Webull .
As of 11 October 2023, the QQQ ETF closed to US$371. This would mean that you would need US$371 to purchase a unit of the QQQ ETF.
However, with fractional shares, it is now possible to own part of the QQQ ETF without committing to a whole share. This means that you can invest with as little as US$5, widening the opportunity for you to invest in even more companies.
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