Many experienced investors will tell you that it’s extremely difficult to beat the S&P 500 (SNPINDEX: ^GSPC) over the long term. According to SPIVA Scorecards, 89.5% of hedge funds underperformed the S&P 500 over the past 10 years. During that decade, the S&P 500 advanced 245% and delivered a total return of 312%.
It’s tough to outperform the S&P 500 because it’s diversified across the 500 leading companies in America. Therefore, it would have been simpler, cheaper, and more profitable to invest in a passively managed S&P 500 exchange-traded fund (ETF) — like the Vanguard S&P 500 ETF (VOO +0.00%) — instead of an actively managed hedge fund.
However, one ETF consistently outperformed the S&P 500: the Invesco QQQ Trust (QQQ +0.01%), which rallied 482% and delivered a total return of 528% over the past decade. Let’s see why this ETF performed so well — and if it should be on your investing radar right now.
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What does Invesco QQQ own?
Invesco QQQ is a passively managed ETF that tracks the Nasdaq-100 index. That index consists of the 100 largest, non-financial stocks listed in the Nasdaq stock market. Its biggest holdings include Nvidia, Microsoft, Amazon, Apple, and Broadcom.
Those are also the S&P 500’s top companies, but those higher-growth tech stocks account for a bigger slice of the Nasdaq-100 than the S&P 500. Many of the S&P 500’s slower-growth stocks, like Target, aren’t included in the Nasdaq-100. Moreover, the Nasdaq-100 intentionally excludes financial companies — which account for about 14% of the S&P 500 — because they have different balance sheets and earnings structures than its core tech, healthcare, and consumer-focused firms. Financial companies are also generally driven by interest rates and credit cycles than organic growth, innovation, and market demand.
In other words, the Nasdaq-100 is a leaner index that focuses more on higher-growth plays than the S&P 500. But it’s also more volatile, since it lacks many of the slower-growth, safe-haven stocks that hold up better during bear markets and market downturns.
What are QQQ’s strengths and weaknesses?
Invesco QQQ is an easy way to gain some balanced exposure to the highest-growth blue-chip stocks in America. It might endure some wilder short-term swings than the S&P 500, but it could continue to outperform the benchmark index over the long term. QQQ’s top holdings will all benefit from the secular expansion of the cloud, artificial intelligence (AI), and semiconductor markets. So if you want to profit from those trends but don’t know where to start, it could be a great idea to simply invest in this ETF.
However, QQQ charges an expense ratio of 0.20%, which is higher than the Vanguard S&P 500 ETF’s ratio of 0.03% and the average expense ratio of 0.14% for passively managed ETFs. QQQ charges a higher fee because it was created as a unit investment trust (UIT), which pools securities into a fixed portfolio. Unlike open-ended funds, UITs can’t reinvest their dividends before paying them, lend out their securities for income, or continuously adjust their portfolios to reduce their expenses. That’s why QQQ needs to charge higher fees than open-ended funds.
Back when Invesco created QQQ in 1999, it was easier for a UIT to be approved than an open-ended fund. But today, open-ended funds are far more common than UITs. That’s why Invesco launched a nearly identical open-ended ETF in 2020: the Invesco NASDAQ 100 ETF (QQQM +0.01%), which charges a lower expense ratio of 0.15%. It’s also in the process of converting QQQ from a UIT to an open-ended fund to reduce its expense ratio to 0.18%.
Should QQQ be on your investing radar right now?
QQQ charges a higher fee than many other ETFs, but it’s still a reliable long-term investment. But instead of buying QQQ today, it’s probably smarter to invest in QQQM because it tracks the same index at a lower fee. It isn’t traded as actively as QQQ — which is one of the world’s most liquid ETFs — but it should generate slightly higher total returns.
