[Editor’s Note: This article was updated on April 24, 2020, to correct the name of the fund.]
The Invesco QQQ ETF (NASDAQ:QQQ) has a place in every investor’s portfolio. Why? Because it provides heavy exposure to some of the largest trends in technology.
There’s obvious benefits to single-stock ownership. Everyone wants to be the one who hits a 10-bagger in Netflix (NASDAQ:NFLX) and changes the trajectory of their portfolio forever.
Unfortunately, for every 10-bagger there’s a load of losses elsewhere. Put simply, while single-stock selections can be rewarding, they can also be very risky. And that’s not including the volatility. Netflix reported solid earnings on April 22 and hit a new all-time high in the after-hours session as a result. While it’s easy to celebrate the big move now, how many investors were shaken out of Netflix when the stock suffered a peak-to-trough decline in excess of 80% several years ago?
The point is, single-stock picking can be hard. Even for the investors who enjoy it, there can be room for some core ETF holdings, too. Let’s take a closer look at the QQQ ETF.
What Makes Up the QQQ ETF?
Buying the Invesco QQQ ETF is basically buying FAANG+M. In other words, investors are going to get a lot of exposure to mega-cap tech stocks with this fund. That knife can cut both ways though.
Say someone is long individual stock picks that include Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). They should know that these stocks make up the top five stock holdings in this ETF.
In other words, investors who are long these stocks shouldn’t look at the QQQ ETF as a means of diversification, because they won’t be getting very much. However, that doesn’t mean individual owners of these stocks have no use for the ETF. It can serve as a great hedge to this group too, due to the heavy weighting of its top holdings.
Further, investors who are long non-FAANG+M stocks and are looking for some tech-focused diversification should consider the ETF. The QQQ gives investors exposure to not only the stocks above, but many secular trends in tech. Things like online search, streaming video, e-commerce, cloud computing, social media and digital advertising.
Apple and Microsoft are the top two holdings, weighing in at just over 23% of the fund. Amazon sits at 9.6% and Google (when including both classes of stock) weighs in at 7.9%. Facebook sits at ~4%. Between the five, we’re talking about 44% of the overall weighting.
All About Performance
Put simply, this one is a winner. The QQQ ETF has risen in 10 of the last 11 years. The lone “down year” during that stretch came in 2018, where shares fell less than one percent.
Critics will say that range is cherry picked, arguing that it sidesteps the Great Recession. Well how about this: The ETF is higher 15 out of the past 17 years. In 2008, the ETF fell 42% before rebounding 54% in 2009 and fully recouping all of those losses by the time 2010 was in the books.
How does that compare to the S&P 500? Surprisingly, the volatility hasn’t been as extreme as one might think.
While the QQQ did decline 42% in 2008, that was only slightly worse than the 38.5% decline in the S&P 500. However, the rebounds were much different. The S&P 500 only rebounded 23.5% in 2009 and also took out the 2008 low — something the QQQ never did while rallying more than 50% that year. Further, while the QQQ recouped all of its 2008 losses by the end of 2010, it took the S&P 500 until 2013 to do so.
It doesn’t matter if we’re talking about a short or long timeframe either. Year to date, the QQQ is virtually unchanged, down about 0.83% vs. the S&P 500’s 13.2% decline. Over the past year, the QQQ is up 12.3% vs. a 3.6% decline for the S&P 500. The outperformance simply gets more stark over time. For instance, the QQQ ETF is up 91% over the past five years, while the S&P 500 is up just 32.5%. Over the last decade, the performance sits at 317% vs. 127%, respectively.
At the end of the day, the numbers don’t lie. The Invesco QQQ is a solid core holding for investors, whether they prefer broad-market exposure or single-stock selection.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.