QQQ has consistently outperformed the S&P 500.
The AI market’s rapid expansion could drive its shares even higher.
Invesco QQQ Trust (NASDAQ: QQQ), an exchange-traded fund (ETF) that passively tracks the Nasdaq-100 index, has rallied more than 20% this year. By comparison, the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) have only risen 13% and 16%, respectively. Let's see why QQQ outperformed the benchmark indexes -- and why it might have more room to run over the next few years.
The Nasdaq-100 includes only the 100 largest non-financial stocks listed on Nasdaq. It excludes financial stocks (which account for about 3% of the Nasdaq Composite) because they're more dependent on interest rate cycles than on innovation and organic growth.
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QQQ's top holdings include Nvidia (NASDAQ: NVDA) (8.3%), Apple (NASDAQ: AAPL) (7.4%), Microsoft (NASDAQ: MSFT) (5.5%), Micron (NASDAQ: MU) (5.1%), and AMD (NASDAQ: AMD) (4.2%). Those are also the S&P 500's top holdings, but QQQ allocates larger shares of its portfolio to each stock because it only invests in 100 companies instead of 500.
Most of the S&P 500's slower-growth stocks aren't included in the Nasdaq-100 and QQQ. The Nasdaq-100 is also rebalanced quarterly and reconstituted annually, so it keeps its existing winners, adds new high-growth stocks, and prunes its weaker ones.
That's why QQQ is better optimized for long-term growth than ETFs that track the S&P 500, yet it charges only a low expense ratio of 0.18%. Therefore, it's a simple way to stay invested in the market's highest-growth stocks without doing any research on individual stocks.
QQQ's top holdings are all heavily exposed to the AI boom. Nvidia, Micron, and AMD provide crucial chips for AI clusters; Apple is integrating more AI features into its devices; and Microsoft's Azure -- the world's second-largest cloud infrastructure platform -- is becoming a major ecosystem of first- and third-party generative AI applications. Its portfolio also includes other AI heavyweights -- including Amazon, Meta, Alphabet, and Tesla.
Most of those stocks still look surprisingly cheap relative to their growth potential. For example, Nvidia trades at just 15 times next year's earnings -- even though analysts expect its EPS to grow at a 60% CAGR from fiscal 2026 (which ended this January) to fiscal 2029.
Even though the AI market faces some near-term pressure from more cautious AI spending, tighter regulations, and higher interest rates, it will likely continue to expand in the coming decades as AI applications optimize, accelerate, and automate more tasks. That's why QQQ will likely rally even higher and stay ahead of the S&P 500 and Nasdaq for the foreseeable future.
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Leo Sun has positions in Amazon, Apple, and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Micron Technology, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.