QQQ ETF Risks and Rewards

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.

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.