Before You Buy the Invesco QQQ ETF, Here Are 3 Others I'd Buy First
If you're looking for a way to invest in the biggest tech companies currently powering the stock market higher, you've likely considered investing in the Invesco QQQ Trust ETF (NASDAQ: QQQ). The exchange-traded fund (ETF) tracks the Nasdaq-100 index, which consists of the 100 largest stocks listed on the Nasdaq Stock Exchange. Tech stocks account for the majority of the index's value, with the "Magnificent Seven" making up over 40% of the fund's portfolio.
Investors looking to add some more tech exposure can do well with QQQ, but there are even better options out there. Here are three ETFs I'd consider before the Invesco QQQ Trust.
1. Nasdaq 100 ETF: A less expensive option for buy-and-hold investors
Investors looking to increase exposure to the Nasdaq-100 index in general don't have to pay the 0.2% expense ratio charged by Invesco for its QQQ Trust. Invesco offers a cheaper alternative that's completely suitable for most investors.
In 2020, Invesco launched the Nasdaq 100 ETF (NASDAQ: QQQM). It follows the same trading rules as QQQ, but it charges just 0.15% per year instead of 0.2%.
QQQ holds over $300 billion in assets, and many investors are locked into the fund with huge unrealized capital gains. That can make them hesitant to sell shares even if there's a cheaper option. Instead of lowering the price for QQQ, Invesco determined it could generate more revenue by launching a new ETF. The new ETF is priced more competitively with other broad-based index ETFs. That can help Invesco attract new investors looking to buy an ETF for the first time.
There are some caveats, though. The trading volume for the newer ETF is significantly lower than its older sister. That means that you might experience wider bid-ask spreads when you look to buy or sell shares. But that's mostly important for short-term or institutional traders looking for highly liquid investments. For the average buy-and-hold investor, the less expensive ETF will come out ahead over the long run.
2. Direxion Nasdaq-100 Equal Weighted Index ETF: Get more exposure beyond the Magnificent Seven
As mentioned, the Magnificent Seven stocks make up over 40% of the QQQ Trust ETF. The same is true of the Nasdaq 100 ETF. The top 10 companies in the ETF account for over 50% of the fund's value. That is to say, the portfolio is heavily concentrated.
You may want a simple fund that offers exposure to the big tech names in the Nasdaq-100, without putting most of your money into just a handful of names. After all, that's the general idea behind index funds. To that end, you might consider the Direxion Nasdaq-100 Equal Weighted Index ETF (NYSEMKT: QQQE).
The ETF invests 1% of its assets in each of the 100 constituents of the Nasdaq-100 index. The ETF rebalances once every quarter, adjusting for any changes in the index.
Equal-weight indexes historically outperform cap-weighted indexes over the long run. That's because smaller companies can generally grow faster than larger ones. Using an equal-weight index fund allows you to invest more of your money in those smaller companies without entirely eschewing the big market leaders.
Direxion charges an expense ratio of 0.35% for its index fund. Over time it could prove worth the premium to the QQQ Trust.
3. Vanguard Total Stock Market ETF: A much broader index fund with a much smaller expense ratio
If you want some middle ground between the extremely concentrated Nasdaq-100 index and the completely equal-weight fund offered by Direxion, you might consider a broader index fund. The Vanguard Total Stock Market ETF (NYSEMKT: VTI) offers a ton of exposure to the big tech companies that dominate the Nasdaq, while also adding a small amount of exposure to small- and mid-cap stocks.
That added exposure can provide more downside protection. The Nasdaq stocks can be much more volatile, which can lead to some big swings in the value of your holdings. That works in your favor when stocks are going up, but it can be especially tough in down markets. The total market index outperformed the Nasdaq-100 during the tumultuous decade of the 2000s.
Investing in the total stock market index doesn't mean abandoning big tech stocks, though. The Magnificent Seven stocks, for example, still account for 28% of the fund's portfolio. But investors will also get exposure to a broader set of stocks and industries, including financials, which are completely left out of the Nasdaq-100.
On top of the diversification, the other benefit of the Vanguard Total Stock Market ETF is its minuscule expense ratio. Vanguard charges just 0.03% per year, one of the lowest fees in the market.
Despite the recent success of the QQQ Trust ETF, investors would be wise to look elsewhere before putting more money into the fund.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Index Funds - Vanguard Total Stock Market ETF. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
Before You Buy the Invesco QQQ ETF, Here Are 3 Others I'd Buy First was originally published by The Motley Fool