Despite its popularity, QQQ is rarely the best choice for investors.
Want to quickly and easily invest in high-flying tech stocks? Nasdaq-100 One of the most popular ETFs that you can buy based on an index is Invesco QQQ Trust ETF (QQQ 1.54%).
The fund tracks the performance of the Nasdaq 100, which consists of the largest non-financial companies listed on the Nasdaq Stock Exchange. The majority of the most heavily weighted companies in the index are well-known technology companies that have driven overall market returns over the past year and a half. Technology stocks account for nearly 60% of QQQ’s holdings.
Invesco’s QQQ Trust’s strong track record is undeniable. However, there may be some better opportunities for investors just entering the market. Here are three ETFs you might want to buy before adding QQQ to your portfolio.
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1. Get QQQ discounts on sister ETFs
Invesco launched QQQ in 1999. This makes him old in the ETF world. There wasn’t a lot of competition at the time, so they were able to command relatively high prices for ETFs.
But today is a different story. Dozens of financial institutions offer ETFs these days. And as new competitors enter the market, expense ratios fall as they compete for investors.
Invesco in 2020 Invesco NASDAQ 100 ETF (QQQM 1.55%). This ETF uses the same criteria and trading rules as its older sibling, but charges investors 5 basis points less. The expense ratio is 0.15%, which is higher than QQQ’s 0.2% commission.
The new ETF is designed for small retail buy-and-hold investors. Older and larger QQQ trusts don’t offer much liquidity, but for those who don’t plan on moving in and out of their investments, these factors are less important. Institutional investors who trade frequently on QQQ are willing to pay a few basis points more to lower the spread on their trades. But small buy-and-hold investors shouldn’t do that.
If you’re sure you want to buy a Nasdaq 100 index fund, skip QQQ and go for its little brother. But there may be even better opportunities on the market.
2. Keep your portfolio from getting too concentrated with this simple ETF
The Nasdaq 100 is not very diversified. First, there are only 100 companies. Nearly 60% of the index is made up of tech stocks.
In addition, the emphasis on market capitalization means that the largest companies are disproportionately represented in portfolios. Due to the strong performance of the Magnificent Seven, the top 10 companies in the index account for almost half of the total portfolio.
Investors can further increase exposure to a diversified portfolio by investing in an ETF that tracks an equal weight index.of Invesco S&P 500 Equal Weight ETF (RSP 0.05%) Tracks the S&P 500 Equal Weight Index. Unlike the S&P 500 and Nasdaq 100, which are market capitalization-weighted indexes, an equal-weighted index spreads your portfolio evenly across all constituents of the index.
for example, microsoft It accounts for 8.8% of QQQ Trust and 7.1% of SPDR S&P 500 ETF. This is only 0.2% of the isoweight index. And whether Invesco outperforms or underperforms this spring, Invesco will rebalance back to 0.2% at the beginning of each quarter.
Increasing the weight of smaller companies in an index creates an opportunity to outperform the standard index. While megacap stocks have driven the overall performance of the S&P 500 in recent years, smaller companies have historically had better returns over the very long term. The equal-weight index has generated nearly 1 percentage point higher annual return than the cap-weighted S&P 500 since 2003.
The expense ratio is only 0.2% and you pay the same fees as QQQ. But you get more diversification.
3. Tilt your portfolio in this historically outperforming segment
Those looking at the Invesco QQQ Trust ETF are likely drawn to the historically strong returns of the Nasdaq 100 Index compared to the S&P 500. However, the concentration of large-cap growth stocks across the investment universe makes us reconsider. Historically, small-cap stocks and value stocks outperform over the long term. Small-cap ETFs could generate better returns than Invesco QQQ Trust in the future.
The recent strong performance of large-cap stocks and relatively weak performance of small-cap stocks has created a large valuation gap between the two market segments. The NASDAQ 100 has a P/E ratio of 29.7 times. Even if you look strictly at large-cap value stocks, their P/E ratios are relatively high.of Vanguard Value ETFFor example, the P/E ratio is 19.3x.
By comparison, small-cap value funds such as: Avantis US Small Cap Value ETF (AVUV 0.39%) The P/E ratio is just 7.8x. This suggests that small-cap value stocks currently have far more upside than downside risk.
There is reason to think that the gap will narrow in the future. First, you can usually rely on regression to the mean. This is a phenomenon in which the future generally looks more like the long past than the recent past. As a result, it is not uncommon for a company, industry, or market segment to experience several years of dramatic performance followed by a period of underperformance.
Additionally, one of the biggest factors affecting small-cap stocks is interest rates. High interest rates can be a bigger challenge for small businesses than for large companies. The Fed has raised interest rates rapidly over the past two years. The timing of the interest rate cut is currently under consideration. As interest rates begin to fall, investors should focus on the strong performance of small-cap stocks.
All of this means that small-cap value stocks look very attractive in the current market environment and may deserve more attention than the Invesco QQQ Trust ETF.
Adam Levy has positions in American Century ETF Trust – Avantis Us Small Cap Value ETF and Microsoft. The Motley Fool owns positions in and recommends Microsoft and Vanguard Index Fund – Vanguard Value ETF. The Motley Fool recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
