Buy This Nasdaq Index Fund. History Says It Could Soar More Than 100% in 5 Years.
Key Points
The Nasdaq-100 recorded an average five-year total return of 103% during the last two decades.
The Invesco QQQ Trust, which tracks the Nasdaq-100, is heavily exposed to artificial intelligence stocks.
The Nasdaq Composite fell into correction territory last month, creating a buying opportunity for patient investors.
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The Nasdaq Composite (NASDAQINDEX: ^IXIC) is one of three major U.S. stock market indexes. It includes more than 3,000 companies listed on the Nasdaq Stock Exchange. The Nasdaq-100, which tracks a subset of those companies, recorded an average five-year return of 103% (including dividends) during the past two decades.
Put differently, history says the Nasdaq-100 could roughly double investors' money over the next five years. You can lean into that possibility by owning shares of the Invesco QQQ Trust (NASDAQ: QQQ). And now is a particularly good time to buy.
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The Invesco QQQ Trust is heavily exposed to artificial intelligence stocks
The Invesco QQQ Trust (NASDAQ: QQQ) measures the performance of the Nasdaq-100, a subset of the Nasdaq Composite that includes the 100 largest nonfinancial companies listed on the Nasdaq Stock Exchange. The top 10 holdings, listed by weight, are as follows:
- Nvidia: 8.6%
- Apple: 7.6%
- Alphabet: 6.5%
- Microsoft: 5.5%
- Amazon: 4.5%
- Tesla: 3.8%
- Meta Platforms: 3.5%
- Walmart: 3.3%
- Broadcom: 3%
- Costco Wholesale: 2.4%
The Nasdaq-100 excludes financial companies to focus on more innovative market sectors. Specifically, the index has more than 80% of its assets concentrated in technology and consumer discretionary stocks, and both sectors are likely to perform well as artificial intelligence (AI) reshapes the economy.
The Invesco QQQ Trust provides exposure to the listed chipmakers and cloud hyperscalers, but also other suppliers of AI infrastructure, such as ASML, Advanced Micro Devices, Marvell Technology, and Western Digital. In addition, the index fund includes software companies that have embedded AI capabilities into products, such as AppLovin, CrowdStrike, Datadog, Palantir, and Shopify.
The Invesco QQQ Trust has a reasonable expense ratio of 0.18%, meaning shareholders will pay $18 per year on every $10,000 invested in the index fund. The single largest drawback is concentration risk. The 10 largest holdings account for nearly 50% of its performance, which frequently leads to volatility. Investors should consider buying the Invesco QQQ Trust only if they are comfortable with rapid price swings.
History says now is a particularly good time to buy the Invesco QQQ Trust
The Nasdaq Composite closed more than 10% below its record high on March 26. That put the index in market correction territory. Drawdowns on that scale have historically been a good time to invest money in the stock market.
Since 2010, the Nasdaq has been through 13 market corrections, 10 of which happened at least five years ago. I ran the numbers on those events and found something interesting: After the Nasdaq's first close in correction territory, the Nasdaq-100 achieved five-year total returns ranging from 106% to 200%. The average five-year total return was 146%.
Earlier, I mentioned the Nasdaq-100 had achieved an average five-year total return of 103% over the past two decades. But history says the index is likely to perform even better over the next five years because it is starting from correction territory. That makes the present is an especially good time to buy shares of the Invesco QQQ Trust.
As a caveat, the Nasdaq-100 has fallen in five straight weeks, primarily because the U.S.-Iran war has pushed oil prices to a multiyear high, which has led a resurgence in recession fears. The index may continue to decline for several more weeks or even months if elevated oil prices becomes a persistent theme.
Here's the bottom line: History says the Nasdaq-100 is likely to perform very well over the next five years, not only because artificial intelligence is likely to be a major growth driver for technology stocks, but also because the broader Nasdaq recently dropped into correction territory. However, that does not mean the index will go straight. A long-term mindset is important.
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Trevor Jennewine has positions in Amazon, CrowdStrike, Nvidia, Palantir Technologies, Shopify, and Tesla. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Alphabet, Amazon, Apple, Costco Wholesale, CrowdStrike, Datadog, Marvell Technology, Microsoft, Nvidia, Palantir Technologies, Shopify, Tesla, Walmart, and Western Digital and is short shares of Apple. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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