Investing in the Nasdaq: A Smart ETF Choice for the New Year

When individuals talk about investing in the Nasdaq, it can signify various things.

For some, it might mean putting money into the Nasdaq Composite, which is among the three major indexes in the U.S. stock market, comprising nearly every stock traded on the Nasdaq (NASDAQ: NDAQ) exchange. Other investors may refer to putting their money in the Nasdaq-100, which only includes the largest 100 non-financial stocks within the Nasdaq Composite.

Neither choice is inherently superior, as the decision largely depends on personal preference. The Nasdaq Composite is broader and more diversified, boasting over 2,500 companies, while the Nasdaq-100 focuses on the most prominent firms.

As we look toward the new year, one appealing option for potential investors is a Nasdaq-100 exchange-traded fund (ETF) like the Invesco QQQ Trust (QQQ). This ETF is one of the most popular in the stock market and has provided impressive returns over many years.

Growth Potential of the ETF's Top Holdings

The QQQ ETF is market-cap-weighted, meaning that larger companies constitute a more significant portion of the fund than smaller ones. As a result, several major tech stocks are leading its performance. Here are the top 10 holdings of the ETF:

Company	Percentage of the ETF
Apple	8.96%
Nvidia	7.88%
Microsoft	7.83%
Amazon	5.62%
Meta Platforms	5.12%
Broadcom	4.89%
Tesla	4.61%
Costco Wholesale	2.70%
Alphabet (Class A)	2.58%
Alphabet (Class C)	2.48%

Data source: Invesco. Percentages as of December 10.

With just 10 companies making up over 52% of the ETF, it may not be considered a textbook example of diversification. Nevertheless, these companies have strong growth potential heading into 2025 and beyond. The key drivers include several megatrends like artificial intelligence (AI), cloud computing, and electric vehicles (EV).

While AI is not a standalone industry, it is set to transform numerous sectors significantly. With their advancements in graphics processing units (GPUs), data centers, and machine learning, the listed companies are leading the way in AI innovation.

Cloud computing is still early in its adoption journey, but major players like Amazon, Microsoft, and Alphabet hold market shares of 31%, 20%, and 11%, respectively.

The global electric vehicle market exceeded $500 billion in value in 2023 and is anticipated to grow to nearly $1.9 trillion by 2032, a compound annual growth rate close to 14%. Although Tesla is the sole EV manufacturer among the top 10 holdings, it relies on various companies for its hardware and software components.

A Track Record of Outperforming the Market

The Invesco QQQ Trust has experienced remarkable success since its introduction in March 1999, yielding over 930% (as of December 12) and averaging around 9.5% annual returns—outperforming the S&P 500 in the process. A $1,000 investment in the ETF at its inception would now be valued at over $10,300.

Though past performance cannot guarantee future profits, it is reassuring to note that the ETF has weathered various market downturns, including the dot-com crash, the Great Recession, and the impacts of the COVID-19 pandemic.

Additionally, the QQQ ETF provides investors with an appealingly low expense ratio of 0.2%, which translates to a cost of $2 for every $1,000 invested annually. While not the cheapest option compared to some S&P 500 ETFs (like a Vanguard option at 0.03%), it remains competitively priced overall.

While cost might not be the primary factor when selecting an ETF, small differences in fees can accumulate to significant amounts over time. The QQQ ETF offers a relatively affordable choice with demonstrated success and tremendous growth potential for its key holdings.

investing, Nasdaq, ETF