Why Investors Should Skip Invesco QQQ

Invesco QQQ Trust QQQ has turned in exceptional performance over the past 15 years, but its Nasdaq-only focus arbitrarily restricts its opportunity set and breeds sector concentration. It retains its Morningstar Analyst Rating of Neutral.

The rules underpinning the construction of the Nasdaq-100 Index, which this fund tracks, are borne out of Nasdaq's desire to promote its exchange—not investment rationale. The benchmark plucks the 100 largest nonfinancials firms listed on the Nasdaq and weights them by market cap. It automatically excludes stocks listed elsewhere, which shrinks the fund’s opportunity set for no economic reason. Some of the large-cap market's best recent performers, like AbbVie ABBV and Eli Lilly LLY, are excluded because of their New York Stock Exchange listings. And should one of the fund's marquee holdings move from the Nasdaq, the fund would have no choice but to sell it.

The fund's Nasdaq-only remit precipitates sector concentration. Its allocation to technology (50% of portfolio as of April 2022) and communication-services stocks (16%) consistently exceeds that of the Russell 1000 Growth Index, its large-growth Morningstar Category benchmark. Companies within the tech sector—and sometimes different segments within the companies—can derive revenue from differentiated resources. Still, the tech sector's heterogeneity is not a panacea in difficult markets; the Morningstar US Technology Index trailed the Morningstar US Market Index by 7.21 percentage points for the year to date through April 2022, with more volatility.

This fund weights stocks by market cap, with some modifications to reduce concentration. Market-cap-weighting channels the collective market's view on the relative value of each holding and curbs turnover. It's a particularly sensible approach in the large-cap space. These stocks attract vast investor attention and tend to be priced fairly accurately.

Firm-specific risk is a concern despite the modifications. The 10 largest positions have represented more than half the portfolio since November 2016. Its top three holdings, Apple AAPL (13%), Microsoft MSFT (11%), and Amazon.com AMZN (6%), constituted 30% of the portfolio as of April 2022.

Key Proprietary Morningstar Metrics

Morningstar Analyst Rating: Neutral Process Pillar: Below Average People Pillar: Above Average Parent Pillar: Average