Investors don't always need to select individual stocks in order to take advantage of the market's compounding magic. This is where exchange-traded funds (ETFs) come into the picture. There are thousands of these investment vehicles on the market, giving investors access to whatever flavor they choose.
Among the sea of ETFs, though, a popular choice is the Invesco QQQ Trust (QQQ +0.53%). It has performed extremely well in the past decade. And it's a good idea to take a closer look at what it can offer for a portfolio.
Can buying the Invesco QQQ Trust today set you up for life?
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Owning 100 stocks means less diversification than the S&P 500
The S&P 500 is the index that gets the most attention because it represents about 80% of the entire U.S. stock market's capitalization. The benchmark contains 500 or so of the largest domestic companies. Investors who want hassle-free exposure to the stock market in a diversified manner focus on this index.
The Invesco QQQ Trust provides a vastly different setup. It tracks the performance of the 100 largest nonfinancial stocks that trade on the Nasdaq exchange. Investors in the QQQ Trust only own 20% of the number of businesses in the S&P 500, introducing more concentration.
This ETF focuses on innovative and disruptive companies that are pushing the world forward. With that kind of positioning, it's no surprise that the Invesco QQQ Trust skews toward technology. The "Magnificent Seven" make up 45% of the assets in this ETF.
There is exposure to other sectors, but in a less pronounced way. For instance, the energy and real estate sectors combined make up less than 1% of the Invesco QQQ Trust.
NASDAQ: QQQ
Key Data Points
Investors who buy this ETF are essentially betting that these companies will continue to dominate. Moreover, they will be hopeful that powerful secular trends -- like artificial intelligence, cloud computing, and digital advertising -- all have a bigger impact on the economy in the future. If your perspective doesn't agree with technology having more of an effect on the world, then perhaps the Invesco QQQ Trust isn't a smart choice.
Nonetheless, it's hard to argue with the fee structure. On a hypothetical $10,000 purchase of its shares, investors will only pay $20 annually. That translates to a 0.2% expense ratio, which is a compelling value proposition.
Will the Invesco QQQ Trust provide outsize returns?
We have yet to look at the Invesco QQQ Trust's past performance. Over the past decade, its total return was an impressive 477% (as of Dec. 18). This comes out to 19% per year. That's an unbelievable result, which has without a doubt been driven by the success and growth of tech-focused businesses that are targeting huge end markets with their products and services.
It's hard to predict how the ETF will fare in the years and decades ahead. Returns could be just as strong as they have been recently. Lots of capital has been flowing into passive investments, which adds buying pressure to the largest stocks. The ongoing trend of spending fueled by government debt and an ever-expanding money supply add a perpetual liquidity boost as well. These are tailwinds to keep in mind.
Taking a conservative view, assume the Invesco QQQ Trust's returns moderate. Putting a relatively small sum into this ETF today isn't going to set you up for life. But there are some levers you can pull to boost returns.
For starters, consider investing a larger amount up front. Second, think about dollar-cost averaging, adding more savings to the mix over time. And lastly, you could extend your time horizon, which will give compounding more of a runway to help grow your capital.
