There are thousands of publicly traded companies in the U.S. stock market alone. So, when someone asks how the market is doing, how can one possibly know what to tell them? That's where stock market indexes come in. An index follows the prices of a collection of stocks and measures their performance. There are many indexes and they tend to represent a stock market (or a portion of it). You've probably heard of famous stock market indexes, like the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average.
You can't directly invest in an index. Instead, you invest in index funds that hold proportionate shares of the stocks in the index. These exchange-traded funds (ETFs) can simplify investing for many stock buyers, and some index funds have proven to be remarkably effective wealth creators. The Invesco QQQ Trust (QQQ -1.33%) is an ETF that tracks the Nasdaq-100 index, a technology-focused index whose performance has crushed the S&P 500 over time.
Here are three reasons investors should consider buying the Invesco QQQ Trust and holding it forever.
1. Let's start with the obvious: It has a stellar track record
Before discussing the fund's finer details, it might be helpful to highlight just how remarkably the Invesco QQQ has done for investors. When people talk about beating the market, they usually refer to the S&P 500, arguably the golden benchmark for gauging investment returns. The Invesco QQQ has handily outperformed the S&P 500 since the index fund launched in 1999. A $1,000 investment in the Invesco QQQ in 1999 has returned more than 11-fold to date.
QQQ Total Return Price data by YCharts.
The Invesco QQQ Trust has a lot of technology exposure (approximately 60%), so it's impressive that the fund has performed so well despite experiencing multiple stock market bubbles, such as the dot-com bubble in 2000-2001 and the "everything bubble" in 2020-2021. Of course, these bubbles popped, creating steep declines in the Invesco QQQ that the fund has worked back from both times.
2. It's heavy weighting in "Magnificent Seven" stocks
As mentioned above, the Nasdaq-100 and Invesco QQQ lean heavily into technology. More specifically, a large portion of the index and fund comprise a group of humungous technology companies known as the "Magnificent Seven" stocks. This group includes Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla.
Data by YCharts.
These companies became prominent between 2000 and 2010, ascending to multitrillion-dollar market caps in some instances. Their rise has not only resulted in a heavy weighting in the Nasdaq-100 and Invesco QQQ but also helped drive their strong investment returns. In all, these stocks combine for 41% of the fund. In other words, these stocks have won big and helped carry the Invesco QQQ.
3. The Invesco QQQ has a bright future
The "Magnificent Seven" have done so well because these companies managed to build wide competitive moats and dominate (or compete) in many significant and growing end markets, including personal electronics, cloud computing, e-commerce, digital advertising, streaming, electric cars, autonomous vehicles, renewable energy, robotics, artificial intelligence, semiconductors, enterprise software, and more.
Several of these growth trends still have a lot of life left.
Additionally, these companies generate many billions of dollars in annual cash profits. They can unleash all this cash like a financial war chest to outspend or acquire competitors and fund new ideas and projects. Analysts expect most of the Magnificent Seven to grow earnings at a double-digit rate over the long term.
Investors should want growth potential and safety when looking deep into the future. While anything can happen, it's hard to find a stronger group of companies to bet on than the Magnificent Seven. The Invesco QQQ gives you plenty of exposure to them while diversifying across over 90 companies with the remaining 59% of the fund.
Here is how to get the most out of investing in the Invesco QQQ
Holding the Invesco QQQ Trust for a lifetime means you'll probably see ups and downs. The Invesco QQQ has proven to be more volatile than the S&P 500, falling between 60% and 90% from its highs during severe market downturns. It declined over 30% in late 2022 but has nearly doubled since the start of last year.
No investment is bulletproof, but the Invesco QQQ has recovered from every decline since its inception. Given the remarkable companies that headline the fund, I'd probably expect that to continue. Investors should use a dollar-cost averaging strategy to build their investment in the fund so that inevitable volatility becomes an opportunity instead.
