Picking stocks that beat the S&P 500 has been one of the goals for investors, and the tech-heavy Invesco QQQ Trust QQQ, which tracks the Nasdaq-100, has managed to achieve that feat consistently in recent years. Over the past decade, QQQ has skyrocketed 570%, far outpacing the S&P 500's 255% whopping return, per Motley Fool, as quoted on Yahoo Finance.
What Led to the Rally in QQQ?
QQQ tracks the Nasdaq-100 Index, which contains the 100 largest non-financial companies listed on Nasdaq. Around 60% of the ETF is invested in technology companies. It has large holdings in the Magnificent Seven stocks like Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta and Tesla. These companies have surged because of strong growth in artificial intelligence (AI), cloud computing, and digital technology.
The technology sector accounts for about two-thirds of the Nasdaq-100 index. However, the index is not a pure tech play. Note that alongside tech heavyweights, the QQQ ETF has 13.7% exposure to the telecom, 11% exposure to the consumer discretionary, about 7% focus on the consumer staples sector and 4% bet on the defensive healthcare sector. This diversification allows investors to benefit from various themes beyond technology alone.
Can QQQ Continue to Outperform?
Chances of further gains are likely as many of its largest companies have long-term growth opportunities in areas such as AI, cloud computing, enterprise software, semiconductors, biotechnology and digital retail. Despite occasional crashes and valuation corrections, the AI theme is here to stay. Moreover, unlike pure play tech funds, the tech-heavy Nasdaq-100 ETF QQQ will always have the scope to diversify if the tech sector starts crashing.
What are the Risks?
Rich valuation of several AI stocks is a key concern. If AI investments fail to generate enough profits, QQQ may hit a road bump. Also, if the Fed hikes rates ahead for any reason, the fund will likely be hit hard more than its peers because of QQQ’s high growth exposure.
Such an environment is generally unfavourable for growth-oriented technology stocks, which dominate the Nasdaq-100 and account for more than half of QQQ's portfolio.
Investors should note that higher interest rates increase companies' financing costs and reduce the value of their future earnings, making high-growth firms appear less attractive.
As a result, QQQ has historically been more sensitive to changes in monetary policy than the S&P 500-based ETFs like State Street SPDR S&P 500 ETF Trust SPY.
However, these are likely to be short-term threats, while long-term holding of the Nasdaq-100 ETFs will likely be a good idea.
Apart from QQQ, investors can play Invesco NASDAQ 100 ETF QQQM, Direxion NASDAQ-100 Equal Weighted Index ETF QQQE and Pacer Nasdaq 100 Top 50 Cash Cows Growth Leaders ETF QQQG.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
