It’s hard to argue with this booming ETF’s historical performance.
The S&P 500 has generated a total return of 253% in the past decade. That’s a fantastic gain for a passive investment vehicle that provides access to a large group of companies in different industries.
But some investors might want exposure to specific areas of the economy, such as technology-related businesses. If this sounds like you, then you should consider buying $1,000 worth of Invesco QQQ Trust (QQQ 0.74%). Here’s why.
Owning dominant tech companies
The Invesco QQQ Trust is an exchange-traded fund (ETF) that tracks the performance of the 100 largest non-financial stocks on the Nasdaq exchange. This is much different than the S&P 500 which follows the movements of the 500 biggest U.S.-based companies.
Investors need to understand the composition of the Invesco QQQ Trust. It has high exposure to the information technology sector, constituting 51% of assets. And the so-called “Magnificent Seven” combined makes up 43% of the ETF.
Historically, this has worked out well. These businesses have generally registered strong growth. That’s because they benefit from numerous tailwinds, like artificial intelligence, digital payments, digital advertising, electric vehicles, e-commerce, and cloud computing. Today, these seven companies are some of the most valuable in the world.
Stellar performance
The S&P 500 has put up impressive returns in recent years, but the Invesco QQQ Trust has done a lot better. In the past decade, it has generated a total return of 443%, translating to a yearly gain of 18.4%. A $1,000 investment in October 2014 would be worth more than $5,400 today.
It has helped that the economy was mostly in a low-interest-rate environment during much of this time. This favorable backdrop fueled the rise of the top stocks in the QQQ.
Investors might think that owning this ETF is expensive. However, that couldn’t be further from the truth. The Invesco QQQ Trust’s expense ratio of 0.2% means that for every $1,000 invested, only $2 goes toward the fee per year. Investors get to keep more of their money over time.
In the past few years, the Ark Innovation ETF, the flagship fund of Cathie Wood’s Ark Invest, has gotten a lot of attention. Like the QQQ, it also focuses on companies that are innovative and disruptive, but its performance has been abysmal. In the past five years, the Ark Innovation ETF has generated a total return of 12.8%, much lower than the Invesco QQQ Trust’s 164%. And the Ark Innovation ETF carries an expense ratio of 0.75%, almost four-times the QQQ.
Keep this in mind
The Invesco QQQ Trust has had a wonderful year thus far, rising 21.5% (as of Oct. 30). Because it trades near its all-time high, some hesitant investors might be contemplating if now is still a good time to put money to work. After all, isn’t it a better idea to simply wait for a sizable pullback before investing?
In theory, trying to time the market sounds like the right move, buying at the lows and selling at the highs, repeating this process over and over again. But this is a losing proposition, as no one can do it accurately consistently. In fact, you’ll cause more harm to your portfolio by doing this.
The best course of action, then, is to perhaps consider investing that $1,000 right now into the Invesco QQQ Trust and adopting a long-term mindset. If you want to spread that investment out, then utilize a dollar-cost averaging strategy, investing a small sum of capital on a monthly or quarterly basis. This lets you take advantage of multiple price points, without having to correctly time the market.
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.