The Invesco QQQ ETF is a widely held exchange traded fund (ETF) that tracks the Nasdaq 100 Index, and there are distinct advantages and disadvantages to investing in it. Since it passively follows the index, the QQQ stock 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 this volatile index if it rises. However, they also take 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 QQQ stock trading.

Key Takeaways

  • The Invesco QQQ ETF is a popular exchange traded fund (ETF) that tracks the Nasdaq 100 index.
  • QQQ stock holdings are dominated by big technology-related companies, such as Apple, Amazon, Google, and Facebook.
  • The QQQ ETF offers investors big rewards during bull markets, potential for long-term growth, lots of liquidity, and low fees.
  • On the downside, QQQ usually declines more in bear markets, has high sector risk, often appears overvalued, and holds no small-cap stocks.

What Is the Invesco QQQ ETF?

QQQ is an ETF that includes 100 of the largest international and domestic companies listed on the Nasdaq stock exchange, just like the Nasdaq 100 Index that it tracks. The index excludes financial companies, and it is based on market capitalization. Therefore, QQQ stock holdings are heavily weighted toward large-cap technology companies.

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.

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 Nasdaq 100 Index that the QQQ stock price follows is constructed 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 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, as opposed to the actual Nasdaq 100 index, is a marketable security that trades on an exchange. It offers traders a way to invest in the largest 100 nonfinancial companies listed on the Nasdaq.

QQQ ETF Sectors

The Invesco QQQ ETF tracks many different sectors. They include the information technology (IT), communications services, consumer discretionary, healthcare, consumer staples, industrials, and utility sectors. The QQQ is rebalanced quarterly and reconstituted annually.

Please note that some companies that people associate with technology are generally classified in other sectors. For example, Alphabet (Google's parent company) and Facebook moved to the communications services sector when it began. Also, Amazon is part of the consumer discretionary sector.

The sector breakdown of the Invesco QQQ ETF as of Sept. 30, 2020, is given in the table below.

Invesco QQQ ETF Sector Breakdown
Sector Share of QQQ

Information Technology

48.21%

Communications Services

19.14%

Consumer Discretionary

18.93%

Healthcare

6.67%

Consumer Staples

4.67%

Industrials

1.76%

Utilities

0.61%

QQQ ETF Top Holdings

The top 10 stocks in the Invesco QQQ ETF made up about 56% of all QQQ holdings as of Sept. 30, 2020. They are given in the table below.

Invesco QQQ ETF Top Holdings
Stock Share of QQQ

Apple (AAPL)

13.39%

Microsoft (MSFT)

10.76%

Amazon (AMZN)

10.66%

Facebook A Shares (FB)

4.26%

Tesla Motors (TSLA)

3.45%

Alphabet A Shares (GOOGL)

3.42%

Alphabet C Shares (GOOG)

3.31%

NVIDIA (NVDA)

2.88%

Adobe Systems (ADBE)

2.03%

PayPal (PYPL)

1.99%

Apple is one of the most important companies for QQQ investors. It became the first U.S. company to achieve a market cap of $2 trillion in August 2020. Apple has perfected the art of getting consumers into its ecosystem and not letting go. The company accomplishes this by upselling and releasing new versions of old products to keep revenue growing.

Also, Microsoft, Google, and Amazon all have strong operational cash flow. Most of these top stock holdings consistently deliver on the bottom line, which helps investors feel secure. Amazon, for its part, makes significant investments in expanding its businesses.

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.

20.16%

The average annual return of QQQ was 20.16% during the 10 years ending Sept. 30, 2020.

QQQ Pros

  • Big bull market rewards: If you're feeling bullish right now or want a bullish investment for an asset allocation, the QQQ ETF is a good choice. The QQQ stock price often goes up more than the S&P 500 during bull markets, making it useful for sector rotation strategies.
  • Long-term growth potential: QQQ stock holdings include many companies developing new technologies, including computers and zero-emission vehicles. That gives the QQQ ETF more potential for long-term growth. QQQ is also much more diversified than any single technology company, making it safer than any of them in the long run.
  • Liquidity: Frequent traders need to be able to buy and sell quickly at low cost, and the QQQ ETF offers them this liquidity. Assets under management (AUM) for QQQ reached more than $100 billion in 2020, providing a large market for traders.
  • Low expenses: The QQQ ETF's expense ratio was just 0.2% as of Sept. 30, 2020. Reducing the expense ratio is the only guaranteed way to increase returns, and expenses 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 during bear markets. In particular, the QQQ stock price declined significantly when the dotcom bubble collapsed.
  • 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 versus mostly newer FAANG stocks within the Nasdaq.
  • High valuation levels: QQQ stock holdings tend to be too expensive by most of the standards used by value investors. For example, QQQ had a price-to-earnings ratio of 47.48 as of Sept. 30, 2020.
  • No small-cap stocks: Since 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

QQQ Stock FAQs

FAQ 1: What Companies Are in the QQQ ETF?

QQQ stock holdings include 100 of the biggest companies in the Nasdaq, such as Apple, Amazon, Google, and Facebook.

FAQ 2: Is QQQ a Good Stock to Buy?

The QQQ ETF is an excellent buy for bullish frequent traders because of its liquidity and superior performance in bull markets. On the other hand, active traders should be aware that QQQ can lose more than the S&P 500 when it goes down. The QQQ ETF offers buy and hold investors low expenses and long-term growth potential with enough diversification to avoid the risks of betting on one company.

On the downside, long-term investors in QQQ must deal with sector risk, possible overvaluation, and the absence of small caps. Overall, QQQ can be a good long-term investment as part of a larger portfolio.

FAQ 3: Does QQQ Have a Dividend?

Yes, it has a fairly low dividend, with an SEC yield of just 0.57% as of Sept. 30, 2020.

FAQ 4: Is QQQ the Best ETF?

Finding the best ETF depends on your specific investment goals. QQQ is one of the best choices for active traders who are bullish on large technology companies.

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 stock price without being burdened by stock-picking issues.