Three Compelling Reasons to Invest in This Index Fund and Maintain Ownership Throughout Your Lifetime
There are countless publicly traded companies in the American stock market alone. When someone asks about the market's status, it can be challenging to provide an accurate response. That's where stock market indexes prove beneficial. These indexes follow the prices of a variety of stocks and measure their performance. Different indexes exist, each representing a stock market or a portion of it. You've likely heard of popular stock market indexes, such as the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average.
Instead of investing directly in an index, you invest in index funds that hold proportionate shares of the stocks in the index. These exchange-traded funds, or ETFs, make investing more accessible for numerous stock buyers. Some index funds have demonstrated impressive wealth-creating capabilities. The Invesco QQQ Trust, denoted as (QQQ 1.42%), is an ETF that tracks the Nasdaq-100 index - a technology-focused index that has significantly outperformed the S&P 500 over time.
Here are three reasons why investors should consider purchasing the Invesco QQQ Trust and holding it indefinitely.
1. Stellar performance history
Before delving into the fund's intricacies, it's essential to acknowledge its outstanding performance for investors. When people discuss outperforming the market, they usually refer to the S&P 500, which many consider a reference point for evaluating investment returns. The Invesco QQQ has outperformed the S&P 500 since its launch in 1999. A $1,000 investment in the Invesco QQQ in 1999 has grown to over 11 times its initial value.
The Invesco QQQ Trust has a substantial technology exposure (around 60%), making its strong performance even more impressive. Despite experiencing multiple stock market bubbles, such as the dot-com bubble in 2000-2001 and the "everything bubble" in 2020-2021, the fund has managed to recover from these declines.
2. Hefty weighting in "Magnificent Seven" stocks
As mentioned earlier, the Nasdaq-100 and Invesco QQQ have a significant technology focus. In fact, the index and fund feature a large group of prominent technology companies referred to as the "Magnificent Seven" stocks. This group includes Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla.
These companies became prominent between 2000 and 2010 and achieved multitrillion-dollar market caps in some instances. Their success not only led to a heavy weighting in the Nasdaq-100 and Invesco QQQ but also contributed to the fund's robust investment returns. Overall, these seven stocks account for 41% of the fund. Essentially, they have contributed significantly to the Invesco QQQ's success.
3. The Invesco QQQ's promising future
The Magnificent Seven have achieved success due to their creation of formidable competitive advantages and dominant positions (or strong competition) in numerous crucial and expanding markets, such as personal electronics, cloud computing, e-commerce, digital advertising, streaming, electric vehicles, and artificial intelligence. Various growth trends associated with these industries still show potential for expansion.
These companies generate substantial annual cash profits. They use this cash like a financial war chest to outspend or acquire competitors and fund new projects. Analysts expect most of these companies to grow earnings at a double-digit rate over the long term.
Investors seeking growth potential and safety should look to the future with strong companies in mind. The Magnificent Seven represent a formidable group to bet on, and the Invesco QQQ offers extensive exposure to them while also diversifying across over 90 companies through the remaining 59% of the fund.
Investing in the Invesco QQQ for a lifetime means you'll likely experience both ups and downs. The Invesco QQQ has demonstrated volatility greater than the S&P 500, dropping between 60% and 90% during severe market downturns. In late 2022, it fell over 30%, but it has nearly doubled since the start of last year.
No investment can provide bulletproof protection, but the Invesco QQQ has recovered from every decline since its inception. Given the remarkable companies that make up the fund, it's reasonable to expect it to continue its recovery. To capitalize on the fund's volatility, investors should use a dollar-cost averaging strategy to construct their investment in the fund.
After experiencing significant returns, some investors might consider reinvesting their profits in the Invesco QQQ Trust. With a focus on technology stocks, the Invesco QQQ Trust offers diversification benefits by providing exposure to more than 90 companies beyond the "Magnificent Seven."
Moreover, careful financial planning and budgeting can enable investors to make regular contributions to their index fund investments, which can help smooth out the impact of market volatility and potentially enhance long-term returns through dollar-cost averaging.
