Investors have to be pleased with the performance of this notable ETF.
Investors are likely familiar with the S&P 500, an index of 500 large and profitable U.S.-based businesses. This is often viewed as the bellwether for how the overall stock market is performing.
However, the Invesco QQQ Trust (QQQ -0.07%) deserves attention from investors, since it has crushed the S&P 500 in recent times. This exchange-traded fund (ETF) could continue to supercharge returns. But is it a millionaire maker?
Portfolio composition
The Invesco QQQ Trust differs from the S&P 500 because it tracks the performance of just 100 stocks. These are the biggest nonfinancial companies on the Nasdaq stock exchange, known as the Nasdaq 100 Index.
Investors should understand what areas of the economy shine brightly in this ETF. The information technology sector commands a hefty 50.3% weighting in the Invesco QQQ Trust. Businesses that are part of the “Magnificent Seven” combined make up a notable 42.5% of the whole portfolio. Therefore, the performance of these stocks has a big influence.
This has been a benefit in the past few years. Companies in this group of seven are driven by powerful tech-enabled tailwinds, which has boosted their prospects. Digital advertising, cloud computing, digital payments, electric vehicles, online shopping, and streaming entertainment are some trends to pay attention to.
The average investor who wants exposure to these tailwinds doesn’t need to pick single stocks. Buying and holding the Invesco QQQ Trust provides adequate exposure.
Fantastic performance
While it’s crucial to know what this ETF holds, investors are certainly more worried about performance — what matters when it comes to generating long-term wealth.
In the past five years, the Invesco QQQ Trust has produced a total return of 169%. A $10,000 investment made in September 2019 would be worth almost $27,000 today. That’s an impressive gain for a passive investment vehicle, and it trounces the S&P 500.
What’s also worth mentioning is the cost of owning this ETF. The expense ratio is just 0.20%. This means that for every $10,000 you invest, just $20 is earmarked for annual dues. That’s hard to beat.
Cathie Wood and her firm ARK Invest have received a lot of attention in recent years. Investors like the focus on owning innovative and disruptive companies, which is similar to the strategy of the Invesco QQQ Trust.
However, the ARK Innovation ETF, ARK Invest’s main fund, charges an expense ratio of 0.75% but has only returned 16% in the last five years. The performance has disappointed greatly, even though this fund costs nearly four times as much as the Invesco QQQ Trust.
Getting to $1 million
In the past three months, the Invesco QQQ Trust has experienced two notable dips, and there’s no question this ETF will likely have more volatility than the S&P. It’s more concentrated in tech stocks, which see higher ups and downs.
Investors might be wondering if it’s still a good time to invest while the QQQ trades close to its all-time high. It’s crucial to never forget that time in the market matters more than anything else. It can be enticing to trade in and out of stocks to avoid the lows, but trying to time the market is a losing activity.
From its inception in 1999 to today, the Invesco QQQ Trust would have turned a $90,000 initial outlay into a cool $1 million. I think it’s reasonable to assume a similar rate of return in the future. This means that investors who are able to adopt a long-term time horizon, and for those who can put in more cash upfront, getting to $1 million is a realistic outcome, perhaps even in a shorter period than 25 years.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.