The PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) — an ETF (Exchange Traded Fund) that tracks 100 of the largest U.S. and international non-financial stocks listed on the NASDAQ Index — has been a mixed bag this year.
The return this year has been just 3.5%. Yet, this is still better than a variety of other broad-based, well-known ETFs. Just look at the QQQ vs SPY. For the year so far, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up a mere 0.42%.
Here are some other examples:
- Vanguard Total Stock Market ETF (NYSEARCA:VTI): -0.26%
- Vanguard Emerging Markets Stock Index Fd (NYSEARCA:VWO): 0.83%
- iShares Russell 2000 Index (ETF)(NYSEARCA:IWM): 0.80%
No doubt, much of the year has seen gut-wrenching volatility. And this should be no surprise. There are worries that the Federal Reserve may tighten monetary policy too much. There are also geopolitical risks, such as in the Middle East. Hey, just look at the rise in oil prices.
With this in mind, is QQQ still a good buy? Or is it time to get cautious? Well, for those investors with a long-term approach, I think the QQQ ETF is worth considering.
Here are three reasons why:
#1: Is QQQ Still a Good Buy? The ETF Is a Relatively Safe Way to Find Growth
Who doesn’t want growth in their portfolio? We all do, of course.
But when it comes to finding growth stocks, there are significant risks. Consider former darlings like Groupon Inc (NASDAQ:GRPN), Zynga Inc (NASDAQ:ZNGA) and BlackBerry Ltd (NYSE:BB). They have since become mostly dead money.
This is why an ETF is a good option, as you can get a diversified group of stocks — which is definitely the case with the QQQ. What’s more, this ETF focuses on established companies, allowing for fewer of the big swings.
To get a sense of the portfolio, here are the five top holdings: Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), Facebook, Inc. (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL). These are companies have dominant positions in growth categories like mobile, cloud computing, social media, e-commerce and AI (Artificial Intelligence).
#2: Is QQQ Still a Good Buy? There Is Diversification Beyond Technology
About 59% of the QQQ portfolio is made up of technology stocks. Yet, this makes a lot of sense. The fact is that this is where most of the growth opportunities are found.
But the QQQ still has some level of diversification. For example, about 19% of the portfolio is in consumer cyclicals. These include companies like Starbucks Corporation (NASDAQ:SBUX) and Kraft Heinz Co (NASDAQ:KHC).
Healthcare is also another notable part of the portfolio, coming to close to 9%. This is definitely a nice source of growth, especially with biotech companies. Some of the holdings include Amgen, Inc. (NASDAQ:AMGN), Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) and Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN).
#3: Is QQQ Still a Good Buy? The Fees Are Very Reasonable
There are drawbacks to the QQQ. First of all, by being focused on the NASDAQ, this means investors will miss out on other great companies listed on other exchanges. Next, the QQQ is highly concentrated, with only 100 stocks in the portfolio.
But I think the focus on larger companies helps to mute the impact of the volatility. Keep in mind that – over the past five years – the average compound annual growth rate for the QQQ has been an impressive 19.44%.
Finally, the fee structure is attractive, with an expense ratio of only 0.20%. In other words, more of the returns go into the pockets of investors.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.