This ETF Has More Than Doubled the S&P 500's Returns Over the Past Decade. Is It a Buy for the Next Decade?
Key Points
The "Magnificent Seven" stocks account for more than a third of the Invesco QQQ Trust ETF (QQQ).
QQQ has averaged over 20% annualized returns over the past decade.
The tech sector will drive most of QQQ's growth over the next decade, but the ETF won't be entirely reliant on it.
- 10 stocks we like better than Invesco QQQ Trust ›
Any time an investment can outperform the S&P 500 (SNPINDEX: ^GSPC), it's considered a victory. The S&P 500 is the benchmark for most investors, and many Wall Street companies and experts have trouble consistently outperforming it, despite all the resources you can imagine.
One exchange-traded fund (ETF) that has historically beaten the S&P 500 is the Invesco QQQ Trust ETF (NASDAQ: QQQ), which tracks the Nasdaq-100. Over the past decade, QQQ is up 570% compared to the S&P 500's 255% (as of June 23). Both returns are impressive for broad ETFs, but QQQ has been in the upper echelon of ETFs in recent years.
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Given its performance over the past decade, is now a good time to jump on the train for the next decade? I believe so.
Image source: Getty Images.
Tech-heavy, but not a pure-play tech ETF
The Nasdaq-100 tracks 100 of the largest non-financial companies trading on the Nasdaq stock exchange, so although it's tech-heavy (66.9% of the ETF), it includes companies from other sectors. The "Magnificent Seven" stocks -- Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta, and Tesla -- account for nearly 35% of QQQ, but here are some of the other noteworthy non-tech stocks included in it:
- Walmart
- Costco
- Amgen
- Gilead Sciences
- Linde
- Honeywell
- Constellation Energy
This positions QQQ to benefit from ongoing growth in the tech sector, while other sectors can pick up some of the slack when the tech sector struggles. Even when the tech sector isn't struggling, other sectors are sometimes simply performing better, and it pays to have exposure.
The tech sector has been the best-performing sector by a large margin over the past decade. The S&P 500 tech sector is up 830% over that span. However, business cycles vary, and some companies are better positioned to thrive at different times.
Beyond impressive returns in recent years
Much of QQQ's dominance over the past decade is due to the current AI boom. Mega-cap tech stocks have surged in valuation, with nine of the QQQ's component companies valued at $1 trillion or more, based on recent prices. Considering how high a percentage of QQQ these tech stocks make up, it has naturally followed their trajectory.
These stocks have also had a huge influence on the S&P 500's performance, but QQQ's higher concentration in them has been what's separated their returns over the years.
| Investment | Year-to-Date Returns | 3-Year Annual Average | 5-Year Annual Average | 10-Year Annual Average |
|---|---|---|---|---|
| QQQ | 17% | 25.1% | 15.6% | 20.9% |
| S&P 500 | 7.8% | 19.1% | 11.7% | 13.5% |
Data source: YCharts.
Confidence in another decade of growth
There's no doubt that many major tech stocks are valued at a high premium right now. That doesn't mean they're in a bubble or in major trouble, but it does leave them more susceptible to a pullback if investors start having issues with their return (or lack thereof) on AI spending, or begin to prefer more value or dividend stocks.
That said, the companies leading the way for QQQ have growth opportunities ahead that make me confident they'll remain great investments over the next decade. From cloud computing to enterprise software to hardware to retail to biotech and more, QQQ lets you bet on a diverse set of growing industries.
Of course, nothing is guaranteed in the stock market, but if you're betting on industries that are in encouraging positions, those check the boxes. Expecting QQQ to average nearly 21% annual returns over the next decade isn't realistic, but I could see it continuing to outperform the market in that time.
Be mindful if you're investing in both an S&P 500 ETF and QQQ, though, because of the overlap between the two (especially in the top companies). Around 86% of QQQ's holdings are S&P 500 stocks.
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Stefon Walters has positions in Apple, Microsoft, and Walmart. The Motley Fool has positions in and recommends Alphabet, Amazon, Amgen, Apple, Constellation Energy, Costco Wholesale, Gilead Sciences, Honeywell International, Meta Platforms, Microsoft, Nvidia, Tesla, and Walmart. The Motley Fool recommends Linde. The Motley Fool has a disclosure policy.
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