Investors in This ETF Have Earned Far More Than They Could Have Reasonably Expected

Exchange-traded funds have an undeserved reputation. Many investors see them as an easy way out, forcing them to settle for market-matching returns rather than giving them a shot at actually beating the markets. If you like having control of your own investments, then ETFs can feel like giving up.

But not every ETF aims to track the broadest measure of the stock market. If you target certain parts of the market that outperform others, then you can beat popular indexes like the S&P 500 and the Dow even if you take a passive approach. And you also don't have to give up the benefit of diversification to get it.

The Invesco QQQ Trust (NASDAQ: QQQ) has been a big winner for long-term investors, and that's why I've been looking at this ETF to see if it deserves inclusion in the Voyager Portfolio. After having discussed the history of the Invesco QQQ in yesterday's article, today you'll learn more about how well the fund has performed and what's behind its outperformance.

Image source: Getty Images.

Not all markets are created equal

Many ETFs don't spend much time comparing different stock ETFs. They figure that one fund is as good as another when it comes to getting exposure to stocks, particularly among the larger ETFs that tend to track widely followed indexes.

But different markets don't move in lockstep, and for the Invesco QQQ Trust, that's been an important factor in its long-term success. That's precisely because the ETF follows the Nasdaq 100 index, which is composed of the 100 largest nonfinancial stocks by market cap that are listed on the Nasdaq Stock Market.

As it turns out, the Nasdaq 100 includes a bunch of companies that have been at the forefront of technological innovation over the past 15 years. Moreover, it includes larger chunks of them than you'll find in broader index ETFs. That has boosted the Invesco QQQ's performance considerably. The ETF has generated returns of over 18% per year since early 2011, and over 20% per year since 2016. That compares to figures of 13.6% over the past 15 years and about 15% over the past decade for popular S&P 500 index funds.

If that sounds like incredible outperformance, you're right. The Nasdaq 100's track record has been enough to make Invesco QQQ a giant in the ETF universe . Over the past 15 years, only 2 out of 390 large-cap growth funds have outperformed the Invesco QQQ. It has a five-star rating from Morningstar due to its risk-adjusted performance over the past decade. And because it offers exposure to the Nasdaq 100 so easily, it has also become quite popular with institutional investors as the second-most traded ETF in the entire U.S. market.

Getting investors spoiled

In fact, the performance of the Nasdaq 100 and the Invesco QQQ ETF has taught younger investors a lesson that could prove dangerous in the long haul. Returns have been so far above long-term averages that many skeptics fear that a reversion to the mean is inevitable, which could punish Nasdaq-listed stocks that are in the index that the Invesco ETF tracks. If the market were to endure a decade or longer with returns as far below the long-term average as the Invesco QQQ has enjoyed above it, then that could bode ill for the financial prospects of those investing in the ETF now based on its past performance.

So if the Invesco QQQ Trust has done well but seems risky, what's the right thing for investors to do right now? You'll get some guidance in the third and final article on the Invesco QQQ for the Voyager Portfolio that should help you make the best decision for yourself.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.