QQQ ETF Risks and Rewards

What Is the Invesco QQQ ETF?

The Invesco QQQ ETF is an exchange-traded fund (ETF) that tracks the Nasdaq 100 Index. Because it passively follows the index, the QQQ share price goes up and down along with the tech-heavy Nasdaq 100.

Passive management keeps fees low, and investors are rewarded with the full gains of the volatile index if it rises. But they must also bear the Nasdaq 100’s full losses when it falls. In this article, we explain how the QQQ ETF works and then consider the risks and rewards associated with trading the QQQ.

Key Takeaways

• The Invesco QQQ ETF is a popular exchange-traded fund that tracks the Nasdaq 100 Index.
• QQQ holdings are dominated by big technology-related companies such as Apple, Amazon, Google, and Meta.
• The QQQ ETF offers investors big rewards during bull markets, with the potential for long-term growth, ready liquidity, and low fees.
• QQQ usually declines more in bear markets, has high sector risk, often appears overvalued, and holds no small-cap stocks.
• This ETF allows traders to invest in the largest 100 non-financial companies listed on the Nasdaq.

How Invesco QQQ ETF Works

QQQ has 101 holdings and is the seventh-most popular ETF in the world by three-month average daily share volume. The index excludes financial companies and is based on market capitalization. Like the Nasdaq 100, QQQ holdings are heavily weighted toward large-cap technology companies. Assets under management (AUM) at QQQ were $288.23 billion as of June 22, 2024.

The Invesco QQQ ETF was previously known as the PowerShares QQQ Trust ETF. It is also informally called the triple-Qs or the cubes. The QQQ ETF is often viewed as a snapshot of how the technology sector is trading.

The Nasdaq 100 Index that the QQQ share price follows is based on a modified capitalization methodology. This modified method uses individual weights of included items according to their market capitalization. Weighting allows constraints to limit the influence of the largest companies and balance the index with all of its members. To accomplish this, Nasdaq reviews the composition of the index each quarter and adjusts weightings if the distribution requirements are not met.

The Invesco QQQ ETF offers traders a way to invest in the 100 largest non-financial companies listed on the Nasdaq.

QQQ ETF Sectors

The Invesco QQQ ETF tracks many high-tech sectors, including information technology (IT), communications services, and healthcare. The QQQ is rebalanced quarterly and reconstituted annually to track the Nasdaq 100 index.

It is important to remember that some of the companies people associate with technology are generally classified in other sectors. For example, Alphabet Inc. (GOOGL, Google’s parent company) and Meta Platforms, Inc. (META, formerly known as Facebook) are under the communications services sector. Amazon.com, Inc. (AMZN) is part of the consumer discretionary sector.

Important

Trading the QQQ ETF is a good way to get the rewards of investing in technology stocks without the risks of betting on individual companies.

The sector breakdown of the Invesco QQQ ETF as of June 22, 2024, appears in the table below.

QQQ ETF Top Holdings

The top 10 stocks in the Invesco QQQ ETF made up about 51% of all QQQ holdings as of Q2 2024. They are given in the table below.

The top holding of the QQQ ETF holding is Microsoft Corporation (MSFT), which had a market cap of more than $3.3 trillion in Q2 2024.

Meanwhile, Nvidia became one of the top-performing tech stocks in 2024. Apple Inc, Alphabet, and Amazon all have strong operating cash flows and are very popular with investors and funds. Most of these top stock holdings consistently deliver on the bottom line and are able to navigate change without harming their investors. While still offering legacy products like operating systems, Microsoft has successfully reinvented itself, transitioning to its cloud-based Azure and artificial intelligence.

QQQ Dividend History

QQQ Pros and Cons

Like most assets, the QQQ ETF has specific strengths and weaknesses that investors need to consider before putting it in their portfolios.

QQQ Pros

• Big bull market rewards: If you’re feeling bullish or want a bullish investment for an asset allocation, the QQQ ETF is a good choice. The QQQ price increases more than the S&P 500 during bull markets.
• Long-term growth potential: QQQ holdings include many companies that develop new technologies. That gives the QQQ ETF more potential for long-term growth. QQQ is also much more diversified across the growth technology sector. This means it is safer to diversify capital allocation in the tech sector through investment in QQQ than making individual investments.
• Liquidity: Frequent traders need to buy and sell quickly at a low cost. The QQQ ETF offers them this liquidity. AUM for QQQ reached more than $228 billion in 2024, providing a large market for traders.
• Low expenses: The QQQ ETF’s expense ratio was 0.2% as of Q2 2024. Reducing the expense ratio is the only guaranteed way to increase returns from fund investments because expenses can add up over time.

QQQ Cons

• High bear market risk: Just as QQQ tends to outperform the S&P 500 during bull markets, it also often underperforms it during bear markets. In particular, the QQQ share price declined significantly when the dotcom bubble collapsed.
• Volatility risk: Tech sector stocks are growth stocks and are more volatile than the rest of the market. As a result, the Nasdaq 100 also makes many more significant daily, monthly, and annual moves than other indexes, such as the S&P 500. For example, the fund had annual returns of -0.12% in 2018, 38.96% in 2019, -32.58% in 2022, and 54.85% in 2023.
• Nasdaq-only focus: The fund has a Nasdaq-only focus and excludes successful tech companies listed on other exchanges. For example, Salesforce.com, Inc. (CRM), which is listed on the New York Stock Exchange (NYSE), is not included in the index. Neither are Oracle Corporation (ORCL) nor Block, Inc. (SQ), both of which are listed on the same exchange.
• Sector risk: The root cause of the QQQ ETF’s high risks and rewards is that it places more weight on volatile technology-related sectors than the S&P 500. There is also a sector risk that Nasdaq 100 stocks will eventually become less important, much like the railroad companies that once dominated the Dow Jones Transportation Average (DJTA). Investors already talk about old tech stocks vs. mostly newer FAANG stocks within the Nasdaq.
• High valuation levels: QQQ holdings tend to be too expensive by most of the standards value investors use. For example, QQQ had a price-to-earnings ratio of 30.26 on June 22, 2024.
• No small-cap stocks: Because the QQQ ETF holds only 100 of the Nasdaq’s largest companies, it necessarily excludes small-cap stocks. Small caps outperformed larger companies in the long run, according to research by Fama and French. Furthermore, growth investing also emphasizes small companies because they have more room to grow.

Pros

• Big bull market rewards

• Long-term growth potential

• Liquidity

• Low expenses

Cons

• High bear market risk

• Sector risk

• High valuation levels

• No small-cap stocks

• Volatility risk

• Nasdaq-only focus

QQQ Performance

Being more heavily weighted toward growth stocks and high-tech sectors, the Nasdaq 100 (and, by extension, the QQQ ETF, which tracks the index) has outperformed the broader S&P 500 over the past several years.

As the chart below depicts, over the nearly seven-year period from Q3 2017 through Q2 2024, the QQQ has returned 234.71%, nearly double what SPY (an S&P 500 ETF) has returned.

18.59%

The average annual return of QQQ was 18.59% during the 10 years ended Q1 2024.

What Companies Make Up the QQQ ETF?

Stock holdings in the QQQ ETF include 100 of the biggest companies in the Nasdaq, which tend to be tech giants such as Apple, Amazon, Google, and Meta. The top 10 stocks in the portfolio make up over half of its total holdings.

Is QQQ Stock Worth Buying?

QQQ is one of the best choices for active traders who are bullish on large technology companies. It is also one of the most popular Nasdaq-tracking ETFs, although several others also exist.

What Stocks Make Up QQQ?

QQQ mirrors the Nasdaq 100, which is a tech heavy index of large cap stocks listed on the Nasdaq. Companies in Microsoft, Apple, Nvidia, Broadcom, and Alphabet.

Is QQQ the Same as Nasdaq?

QQQ is an index fund offered by Invesco that mimics the returns of the Nasdaq 100 index. Nasdaq is a stock exchange that provides a stock trading platform.

The Bottom Line

The Invesco QQQ ETF checks many of the boxes short-term traders look for in ETFs, and it also has significant advantages for long-term investors. The ETF offers liquid, cost-efficient exposure to a tech-heavy basket of large-cap, innovative companies. Furthermore, investors benefit from increases in the QQQ share price without being burdened by stock-picking issues.

But those advantages are offset by sector concentration and volatility. Stocks contained within the index also have significantly high valuation levels and P/E ratios. This makes them susceptible to steep increases or declines. There are no small-cap stocks in the index to minimize the reliance on large-cap tech stocks.

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