The enthusiasm surrounding Invesco QQQ Trust QQQ, an exchange trading fund built around a select group of the 100 largest non-financial stocks listed on the Nasdaq Exchange, is easy to understand. Thanks to its large exposure to technology and technology-related stocks that dominated the market, the fund has earned chart topping returns over a period of 10 and 15 years. As a result, the fund has attracted approximately $75 billion in net inflows over the past five years, ranking third among the bestselling funds over that period.
Many investors questioning the fund from a portfolio perspective, asking if it makes sense to own both Invesco QQQ and a wide range of market index funds, such as the Vanguard S&P 500 ETF Voo I've heard it from. In a nutshell, the answer is probably not. In this article, we will take a closer look at why.
The holdings are duplicated
The two benchmarks differ fundamentally in several ways. The Vanguard S&P 500 ETF is a true index fund, and aims to follow a rule-based methodology and track benchmarks wherever possible. (Purists quiesce the S&P 500 is not an indicator that is completely pure market-free. Financial statements, and positive revenues for the most recent quarter.)
Investco QQQ follows a much more relaxed approach. First of all, your holdings must be traded on NASDAQ. This is not a fundamental investment factor, but wherever the company's C-suite determines that the stock should trade, it is simply a product. Second, the committee overseeing the NASDAQ-100 index will cover a number of composition weights to avoid excessively large concentrations of stocks such as Microsoft MSFT, Apple AAPL, Alphabet Goog, and other members of “Magnifint Seven.” I've adjusted it.
Despite these differences, there is considerable overlap in the holdings of the two funds. The exhibit below shows 10 of the largest holdings featured in both funds. Both are dominated by stocks that have been leading the market for over the past decade. This includes all the costs of Broadcom Avgo and Costco.
There are also many overlaps in the holdings of the remaining two funds. Approximately 5% of Invesco QQQ's holdings (based on the weighting of assets in the portfolio) are not held either by the Vanguard S&P 500 ETF, as shown in the exhibition below. The Vanguard S&P 500 ETF is more widely diversified, so about two-thirds of the portfolio will not be displayed on the Investco QQQ.
Similar performance, but more negative side risk
Naturally, similar holdings mean similar performance. Over the past three years, Invesco QQQ has been correlated at 0.92 when measured against major index funds such as the Vanguard S&P 500 ETF. In other words, the NASDAQ-100 index typically does not offer a major advantage of diversification.
While moving along the entire market in general, Invesco QQQ is subject to a greater level of drawdown risk. The following exhibits demonstrate performance in several previous market modifications. For example, during the technology, media and communications corrections launched in March 2000, we suffered a cumulative loss of nearly 77% compared to about 33% of our total stock.
Invesco QQQ's technology and communications stock exposure levels can often exceed 60% of assets, but they are the main perpetrators. Exposure to chip stocks, especially Nvidia NVDA, can sometimes be held responsible. For example, during the sale of a DeepSeek-led market in late January, the fund suffered nearly a day's loss, roughly twice the overall market for the stock.
Evaluation risk is another reason behind the more prominent vulnerability of Invesco QQQ.
As shown in the exhibit below, Invesco QQQ holdings are traded at a more steeper rating on all traditional rating scales. Its underlying holdings were trading at a premium of 9.2% on the underlying fair value Morningstar estimate as of February 6, compared to approximately 7.6% of the Vanguard fund.
Conclusion
After all, Invesco QQQ Trust doesn't offer many of the benefits of diversification to investors who already own a wide range of equity index funds. Instead, the fund is better considered an aggressive bet on the ongoing dominance of technology and artificial intelligence stocks. But how much they will continue to dominate is everyone's guess.
