The Invesco QQQ ETF is an exchange-traded fund (ETF) that tracks the Nasdaq 100 Index. Because it passively follows the index, the QQQ share price goes up and down along with the tech-heavy Nasdaq 100.

Passive management keeps fees low, and investors are rewarded with the full gains of the volatile index if it rises. But they also have to bear the Nasdaq 100’s full losses when it falls. In this article, we explain how the QQQ ETF works and then consider the risks and rewards associated with trading the QQQ.

What Is the Invesco QQQ ETF?

QQQ is an ETF that tracks the Nasdaq 100 Index. It has 102 holdings and is the fourth-most popular ETF in the world. The index excludes financial companies and is based on market capitalization. Like the Nasdaq 100, QQQ holdings are heavily weighted toward large-cap technology companies. Assets under management (AUM) at QQQ were $154 billion as of Q3 2022.

The Invesco QQQ ETF was previously known as the PowerShares QQQ Trust ETF. It is also informally called the triple-Qs or the cubes. The QQQ ETF is often viewed as a snapshot of how the technology sector is trading.

The Nasdaq 100 Index that the QQQ share price follows is based on a modified capitalization methodology. This modified method uses individual weights of included items according to their market capitalization. Weighting allows constraints to limit the influence of the largest companies and balance the index with all of its members. To accomplish this, Nasdaq reviews the composition of the index each quarter and adjusts weightings if the distribution requirements are not met.

The Invesco QQQ ETF, as opposed to the actual Nasdaq 100 Index, is a marketable security that trades on an exchange. It offers traders a way to invest in the 100 largest non-financial companies listed on the Nasdaq.

QQQ ETF Sectors

The Invesco QQQ ETF tracks many high-tech sectors, including information technology (IT), communications services, and healthcare. The QQQ is rebalanced quarterly and reconstituted annually to track the Nasdaq 100 index.

It is important to remember that some of the companies people associate with technology are generally classified in other sectors. For example, Alphabet Inc. (GOOGL, Google’s parent company) and Meta Platforms, Inc. (META, formerly known as Facebook) are under the communications services sector. Amazon.com, Inc. (AMZN) is part of the consumer discretionary sector.

The sector breakdown of the Invesco QQQ ETF as of Sep. 30, 2022, appears in the table below.

QQQ ETF Top Holdings

The top 10 stocks in the Invesco QQQ ETF made up about 52% of all QQQ holdings as of Q3 2022. They are given in the table below.

The top holding of the QQQ ETF holding is Apple Inc. (AAPL). The Cupertino company had a market cap of over $2.5 trillion in Q3 2022. Its future prospects look bright as a blockbuster lineup of products continues to mint profits for the company.

Meanwhile, Microsoft Corporation (MSFT), Alphabet, and Amazon all have strong operating cash flow. Most of these top stock holdings consistently deliver on the bottom line and are able to navigate change without causing harm to their investors. Microsoft has successfully reinvented itself, moving away from legacy products like Windows to cloud-based Azure.

QQQ Dividend History

QQQ Pros and Cons

Like most assets, the QQQ ETF has specific strengths and weaknesses that investors need to consider before putting it in their portfolios.

QQQ pros

• Big bull market rewards: If you’re feeling bullish right now or want a bullish investment for an asset allocation, the QQQ ETF is a good choice. The QQQ price often goes up more than the S&P 500 does during bull markets, making it useful for sector rotation strategies. According to investment firm Morningstar, Inc. (MORN), for example, QQQ captured 113% of the iShares Russell 1000 Growth Index’s upside and 107% of its downside in the 10 years leading up through April 2021.
• Long-term growth potential: QQQ holdings include many companies that develop new technologies, such as computers and zero-emission vehicles. That gives the QQQ ETF more potential for long-term growth. QQQ is also much more diversified across the growth technology sector. This means that it is safer to diversify capital allocation in the tech sector through investment in QQQ as opposed to making individual investments.
• Liquidity: Frequent traders need to buy and sell quickly at a low cost. The QQQ ETF offers them this liquidity. AUM for QQQ reached more than $154 billion in 2022, providing a large market for traders.
• Low expenses: The QQQ ETF’s expense ratio was 0.2% as of Q3 2022. Reducing the expense ratio is the only guaranteed way to increase returns from fund investments because expenses can add up over time.

QQQ cons

• High bear market risk: Just as QQQ tends to outperform the S&P 500 during bull markets, it also often underperforms it during bear markets. In particular, the QQQ share price declined significantly when the dotcom bubble collapsed.
• Volatility risk: Tech sector stocks are growth stocks and are more volatile compared to the rest of the market. As a result, the Nasdaq 100 also makes many more daily, monthly, and annual significant moves compared to other indexes, such as the S&P 500. For example, the fund had annual returns of -0.14% in 2018 and 39.12% in 2019.
• Nasdaq-only focus: The fund has a Nasdaq-only focus and excludes successful tech companies listed on other exchanges. For example, Salesforce.com, Inc. (CRM), which is listed on the New York Stock Exchange (NYSE), is not included in the index. Neither are Oracle Corporation (ORCL) nor Block, Inc. (SQ), both of which are listed on the same exchange.
• Sector risk: The root cause of the QQQ ETF’s high risks and rewards is that it places more weight on volatile technology-related sectors than the S&P 500 does. There is also a sector risk that Nasdaq 100 stocks will eventually become less important, much like the railroad companies that once dominated the Dow Jones Transportation Average (DJTA). Investors already talk about old tech stocks versus mostly newer FAANG stocks within the Nasdaq.
• High valuation levels: QQQ holdings tend to be too expensive by most of the standards value investors use. For example, QQQ had a price-to-earnings ratio of 30.43 as of Oct. 30, 2021.
• No small-cap stocks: Because the QQQ ETF holds only 100 of the Nasdaq’s largest companies, it necessarily excludes small-cap stocks. Small caps outperformed larger companies in the long run, according to research by Fama and French. Furthermore, growth investing also emphasizes small companies because they have more room to grow.

QQQ Performance

Being more heavily-weighted to growth stocks and high-tech sectors, the Nasdaq 100 (and by extension the QQQ ETF, which tracks the index) has outperformed the broader S&P 500 over the past several years.

As the chart below depicts, over the 5-year period from Q3 2017 through Q3 2022, the QQQ has returned a total of 88.7%, about double what the SPY (the S&P 500 ETF) has returned.

The Bottom Line

The Invesco QQQ ETF checks many of the boxes short-term traders look for in ETFs, and it also has significant advantages for long-term investors. The ETF offers liquid, cost-efficient exposure to a tech-heavy basket of large-cap, innovative companies. Furthermore, investors benefit from increases in the QQQ share price without being burdened by stock-picking issues.

But those advantages are offset by sector concentration and volatility. Stocks contained within the index also have significantly high valuation levels and P/E ratios. This makes them susceptible to steep increases or declines. There are no small-cap stocks in the index to minimize the reliance on large-cap tech stocks.