Invesco QQQ Is Magnificent, but This 1 ETF Might Be Even Better Right Now
Key Points
The Invesco QQQ ETF (QQQ) is one of the best-performing ETFs of the past decade and beyond.
But it has a real tech sector concentration problem.
The Direxion NASDAQ-100 Equal Weighted Index ETF (QQQE) holds the same stocks as the index but provides a much more balanced approach.
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For years, the Invesco QQQ ETF (NASDAQ: QQQ) has been one of the industry's elite performers. This performance, of course, has been heavily influenced by the overwhelming presence of the U.S. economy's biggest innovators and tech companies.
If there's one complaint about the fund, it's the concentration problem. Right now, roughly 45% of the index is represented by the top 10 stocks.
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| Rank/Company | Ticker | Weight |
|---|---|---|
| 1. Nvidia | NVDA | 7.83% |
| 2. Apple | AAPL | 6.99% |
| 3. Micron Technology | MU | 5.3% |
| 4. Microsoft | MSFT | 4.41% |
| 5. Amazon | AMZN | 4.09% |
| 6. Advanced Micro Devices | AMD | 3.80% |
| 7. Alphabet (class A) | GOOG | 3.26% |
| 8. Alphabet (class C) | GOOGL | 3.06% |
| 9. Tesla | TSLA | 3.05% |
| 10. Intel | INTC | 2.97% |
Data source: Invesco.
The problem might only get worse when Space Exploration Technologies gets added while Anthropic and OpenAI likely wait in the wings. That's a lot of investment to be making in just a handful of stocks.
The better idea might not necessarily be to pivot away from the tech sector altogether, but to diversify within it.
Image source: Getty Images.
The Direxion NASDAQ-100 Equal Weighted Index ETF (NASDAQ: QQQE) uses the same index as the Invesco QQQ ETF, but weights the holdings equally. This simple change to the index construction helps alleviate much of the concentration problem and reduces the heavy reliance on just a few companies to drive returns.
Equal weighting reduces the Nasdaq-100's volatility and concentration problems
In the traditional market cap-weighted version of the Nasdaq-100, tech accounts for 66% of the portfolio, and consumer discretionary adds another 18%. No other sector is even at 4%.
In the equal-weighted version, tech is still a hefty 39% of the portfolio, but five other sectors get allocations of 8% or more. Plus, at rebalance, the top 10 holdings will only account for 10% of the portfolio. Much more balanced and much less top-heavy.
This is a prime example of how more diversification helps limit risk. Using the 5-year beta as a measuring stick, the Direxion NASDAQ-100 Equal Weighted Index ETF is approximately 12% less volatile than the Invesco QQQ ETF. The removal of some tech and megacap exposure has historically resulted in a less volatile ride.
The initial public offerings (IPOs) of the mega-AI companies are likely to only make the concentration problem in the tech sector even worse. By fast-tracking these stocks into the indexes, many funds will need to buy shares to maintain compliance with their mandates. That flurry of trading could make these stocks and the indexes that track them even more volatile in the short term.
The Direxion NASDAQ-100 Equal Weighted Index ETF at least solves some of that problem. It allows investors to invest in the companies they want, while diversifying some of the risk involved.
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David Dierking has positions in Apple. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Intel, Micron Technology, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
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