Can Buying QQQ Today Really Set You Up for Life?

TradingKey - Exchange-Traded Funds (ETFs) provide an alternative to traditional investing, where an investor is required to select individual stocks prior to making investments. ETFs allow you to invest in the entire stock market without having to possess any knowledge of what you are investing in prior to the purchase. 

Thousands of ETFs are available for investors today; however, Invesco QQQ is the most frequently used ETF by investors who believe in the long-term growth potential of its underlying assets. 

Its incredible returns over the past decade, coupled with a straightforward fee structure, have made it very popular among investors. Also, it has a strong concentration in the latest technologies that could potentially change our economy in the near future. 

The question for many investors today is whether or not buying QQQ shares now will provide enough capital for your retirement or will another more complex approach to investing will be better for your financial future.

QQQ is the exchange-traded fund (ETF) that provides a way to invest in the 100 largest non-financial companies listed on the Nasdaq. 

While this may seem broad, compared to other ETFs like the S&P 500, QQQ has a much greater level of concentration among its holdings. With only 20% of the number of companies as held in the S&P 500, QQQ creates greater concentration risk and larger price fluctuations associated with a small number of industry leaders.

The concentration of QQQ was intentional when the ETF was established. The purpose of this ETF was to provide an investment vehicle for innovative, disruptive businesses that are helping to move their respective industries into the future. 

The ETF has a high degree of concentration in the technology sector, with approximately 45% of total assets attributed to the "Magnificent Seven." While there is minimal additional sector exposure provided by this ETF (such as the combination of energy and real estate, which amounts to less than 1% of total assets), when investors buy shares of QQQ, they are effectively betting on the fact that these top companies within that particular category will maintain their dominance, coupled with large-scale growth trends (such as Artificial Intelligence, Cloud Computing, Digital Advertising, etc.) expanding their markets within the economy.

If you believe technology is going to continue to become more influential over time, and QQQ aligns with your view, then you’ll find that the structure of QQQ and associated fees are easy to understand. 

For example, based on a $10,000 investment, you would pay approximately $20 per year in fees, or a 0.20% expense ratio, which provides a tremendous amount of value for this type of investment.

A look at the near past shows that QQQ has been outperforming the overall market. In the past 12 months, QQQ went up about 21% while the S&P 500 Index increased about 18%. This recent strength is indicative of the market's demand for leading technology stocks and of the current excitement surrounding AI.

When we extend the time frame, we can see much more of a story. Since December 18th, 2010, QQQ has had a total return of 477%, which translates into a total return of nearly 19% per year. These numbers are staggering and largely due to world-class technology companies developing products and services to be sold into large global markets. 

Another way to look at the information presented is to show that if you had invested $1,000 on November 25th, 2015, your investment would now be $5,334. Some experts say that the current interest in AI represents, in part, a reaction to the advances in technology over the last five years, so this isn't necessarily an event that has happened only in the past year.

In terms of predicting performance in the next decade, it will be much harder to do. Returns will continue to be good, but they won't be in a straight line. Large caps could continue to experience strong performance due to a structural bid from the larger financial community through passive investment strategies. 

Therefore, an influx of funds through passive strategies could result in an upward effect on the performance of the assets held in QQQ. In addition, continued spending driven by an increase in government debt and an increase in monetary supply could be another source of liquidity driving up QQQ's growth over time. Regardless, the future performance of QQQ is uncertain at this point.

If one is concerned that the AI bubble may burst, it's important to recognize that QQQ does not represent a pure-play AI investment. QQQ holds many companies that are involved with the building of infrastructure, chips, software, and applications needed to support the growth of AI within the global economy. 

Over the long term, companies that are consistently creating innovative processes and products typically continue to create innovative processes and products over time, regardless of whether the themes of innovation come and go. As such, QQQ represents a less risky way for investors that want relatively broad exposure to the growth of technology in the world of investment.

Let’s be realistic. 

Returns will likely drop back to something closer to moderate levels than what we’ve come to expect in the past decade, making a QQQ investment today likely not enough to provide long-term financial independence. 

However, that doesn’t mean purchasing QQQ now won’t provide great value; rather, QQQ will likely become a major component in achieving financial independence eventually. 

In other words, your actions will have a greater influence on investment growth and wealth accumulation than any short-term return might. For example, investing larger amounts initially will produce a more positive effect on total investment performance over time due to the power of compound interest. 

The practice of investing at fixed intervals (i.e., dollar-cost averaging) can provide extra compounding growth through consistent addition of capital. Extending the time horizon until you need to access the assets allows for maximum growth through compounding. All of these things combined with an investment in QQQ will allow you to maximize wealth accumulation.

When comparing technology-focused ETFs (exchange-traded funds) that focus on technology stocks, the logical comparison is between QQQ and VGT. 

They both offer investors similar exposure to technology but do so in different ways; these differences are quite impactful.

QQQ is representative of the top 100 stocks traded on the NASDAQ and, as such, is not limited to one specific industry (although approximately 64% of the holdings of QQQ are technology stocks). 

On the other hand, VGT exclusively invests in companies from the information technology industry. While this sector-specific investing may seem like an easier way to classify “tech” companies, it actually creates significant “blind spots” in the sense that the way a company is categorized within the market may not correlate directly to its business model. 

For instance, there are some of the largest global technology companies, like Google, Meta, and Netflix, that do not fit under Information Technology; instead, they fit into Communication Services. In addition, there are several other large companies like Amazon and Tesla that are in the consumer discretionary sector and are also not part of VGT. 

Therefore, if you are investing in QQQ, not only do you get traditional technology companies, but you also get access to a lot of these platform companies as well.

Concentration on specific stocks is another area where the two indexes differ. 

The three largest companies in both funds are Nvidia, Apple, and Microsoft. The relative concentration levels for each fund can be seen as follows: Approximately 25% of QQQ’s assets are in those three companies versus a little over 45% in the case of VGT.

Though the total percentage allocated to each of these three stocks is similar across both ETFs, a closer examination reveals a large disparity from a weight perspective. For instance, the weight of Nvidia stock is approximately 9.16% of QQQ and 18.18% of VGT. The weight of Apple stock is approximately 8.85% of QQQ and 14.29% of VGT. The stock weight of Microsoft is approximately 7.47% of QQQ and 12.93% of VGT.

When three of the biggest tech names drive nearly half of a portfolio of 314 stocks like QQQ and VGT, the potential rewards can be massive as those names are on fire.

 For example, over the last three years, Nvidia has increased in value by more than 989%, which has made VGT skyrocket. However, it is important to note that with that level of momentum in the market comes the risk of a significant correction. While technology is still a significant driver for companies that produce AI and chip technology, Nvidia is now facing serious competition from Alphabet (Google), Amazon, and Advanced Micro Devices (AMD). 

In the next year, therefore, while the demand for AI products will continue to be strong, an argument can be made that investors would be better served by the more diversified portfolio that is represented by QQQ, which can include technology companies on both sides of the AI space (e.g., hardware manufacturers as well as application developers). A broader investment approach such as QQQ may provide a level of protection when one area within the stack struggles пост.

Performance comparisons provide valuable context but do not resolve the ongoing discussion regarding the two ETFs. 

Historically, VGT has outperformed QQQ for many years, primarily because of the meteoric rise of its leading holdings, including Nvidia. Over time, however, and when one examines all time frames from the first inception of VGT at the beginning of January 2004 until now, QQQ has slightly outperformed VGT. 

While past performance does not guarantee similar future outcomes, the relative positioning of both products is important to analyze. In that context, QQQ is a very diversified product; it includes all of the largest technology companies with which potential investors are most generally familiar, as well as a small number of other non-tech sectors, which provides them with protection from a decline in technology investment. 

QQQ is a great way to invest in leading companies that create innovations, with a low cost compared to investing directly in those companies. Because of the way QQQ is constructed, it is more concentrated in one area (technology), which has led to very high performance (19% CAGR and 477%). You also get a piece of the AI boom without having to invest in one company directly. QQQ also contains other great companies from various sectors that most investors would agree are also important.

If an investor were to buy QQQ today, would it make them financially secure for the rest of their lives? Most likely not by itself, especially if we end up normalizing returns. However, if an investor invests in QQQ significantly and consistently over time, and allows compounding to work, QQQ will likely become an important core holding. Based on historical data, it is the better approach to think about how to invest in QQQ.

When deciding between QQQ and VGT, an investor can choose between two extremely different investment strategies: a higher concentrated technology bet (with increased concentration risk) or a more diversified family of companies with technology exposure and additional sector diversification of names that have performed well. 

It is more critical to understand in detail the nature of what you own, the rationale for owning it, and the means to sustain the investment long-term than finding the "perfect" time to buy.