Picking individual stocks can be rewarding for investors, but it can be a time-consuming and stressful affair. Investors should also ideally diversify their portfolios across a broad range of stocks to avoid putting all their eggs in a single basket.
For investors who don't have the time to buy individual stocks, exchange-traded funds (ETFs) are a simple way to build a diversified portfolio. ETFs hold baskets of stocks that track certain themes or trends, and they can be actively traded throughout the day. That sets them apart from mutual funds, which can only be traded once per day.
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Conservative investors might stick with an ETF like the Vanguard S&P 500 ETF (VOO -1.04%), which passively tracks the S&P 500. However, more growth-oriented investors can invest in the Invesco QQQ Trust (QQQ -1.33%), which tracks the tech-heavy Nasdaq 100. Over the past 10 years, QQQ grew at a compound annual growth rate (CAGR) of 11.02% and beat the S&P 500's CAGR of 5.3%. Past performance doesn't guarantee future gains, but QQQ could potentially keep growing and turn monthly investments of $1,000 into more than $213,000 over the next 10 years.
What does the QQQ ETF actually own?
The QQQ ETF passively tracks the Nasdaq 100. Its top five holdings are currently Apple (9% of its assets), Microsoft (7.8%), Nvidia (7.6%), Broadcom (6.4%), and Amazon (5.5%). That makes it a great way to invest in the broader tech sector without being too heavily exposed to a single company.
Nearly 60% of QQQ's stocks are in the tech sector. Another 18% are in the consumer discretionary sector, 6% are in healthcare stocks, and the rest are spread across other sectors. Over the past 10 years, the QQQ ETF generated a total return of 437%. During the same period, the more broadly diversified S&P 500 only delivered a total return of 243%.
The QQQ ETF charges an expense ratio of 0.2%, which means $20 is automatically deducted from every $10,000 investment. That's much higher than the Vanguard S&P 500 ETF's expense ratio of 0.03%, but it's comparable to other ETFs that bundle together higher-growth stocks. So if you believe the Nasdaq 100 will continue to outperform the S&P 500, the QQQ ETF could be a stress-free way to stay ahead of the market.
How can QQQ turn monthly investments of $1,000 into $213,000?
There's no way to tell exactly where the Nasdaq 100 will head over the long term. But for this theoretical forecast, let's assume it continues to grow at a CAGR of 11% over the next 10 years. If you invest $1,000 in QQQ today and invest an additional $1,000 every month regardless of its trading price, your stake would grow to $213,430 in a decade.
You would have only contributed $121,000 through your monthly investments, but the magic of compounding would have generated $92,430 in additional gains. Using a disciplined dollar-cost averaging approach with scheduled $1,000 investments would also have let you buy more shares as the market swooned and fewer shares as the market rallied.
But assuming you have $121,000 in spare cash lying around, you could net an even bigger gain with a lump sum purchase. Assuming the QQQ grows at a CAGR of 11% over the next 10 years, your initial investment would grow to about $345,000.
That said, either approach could help you ride the Nasdaq 100's growth and beat the S&P 500 over the long term. The key is to stay patient, tune out all the near-term noise, and avoid cashing out too early if you don't need the money right away.
