If you want a quick and easy way to invest in the world’s top tech stocks Nasdaq-100 Index, one of the most popular ETFs you can buy is the Invesco QQQ Trust ETF (NASDAQ:QQQ).
The fund tracks the performance of the Nasdaq-100, which consists of the largest non-financial companies listed on the Nasdaq stock exchange. The vast majority of the index’s most heavily weighted companies are well-known technology stocks, which have driven overall market returns over the past year and a half. Technology stocks make up nearly 60% of QQQ’s holdings.
The strong track record of Invesco’s QQQ Trust is undeniable. But investors just entering the market may have several better opportunities. Here are three ETFs I would buy before adding QQQ to my portfolio.
1. Get a discount on QQQ with its sister ETF
Invesco launched QQQ in 1999. This is ancient in the world of ETFs. Since there was little competition at the time, the company was able to charge a relatively high price for its ETF.
But today it’s a different story. Dozens of financial institutions offer ETFs today. And as new competitors enter the market, expense ratios fall as they compete for investors.
That’s why Invesco launched a new ETF in 2020 called ” Invesco Nasdaq 100 ETF (NASDAQ:QQQM). The ETF uses the same criteria and trading rules as its older brother but charges investors 5 basis points less. Its expense ratio of 0.15% beats QQQ’s fee of 0.2%.
The newer ETF is aimed at small, individual buy-and-hold investors. It lacks much of the liquidity that the older and larger QQQ Trust offers, but these factors are not nearly as important to someone who doesn’t plan on trading in and out of their investment. Institutional investors who frequently trade QQQ are quite willing to pay a few extra basis points for a lower spread on their trades. But small buy-and-hold investors shouldn’t do that.
If you are sure you want to buy a Nasdaq 100 index fund, skip QQQ and go for its younger brother. But there might be better opportunities in the market.
2. Avoid an overconcentrated portfolio with this simple ETF
The Nasdaq-100 is not very diversified. For one thing, there are only 100 companies. Almost 60% of the index consists of technology stocks.
Additionally, it is weighted by market capitalization, meaning the largest companies are disproportionately represented in the portfolio. Following the strong performance of the Magnificent Seven, the top 10 companies in the index account for almost half of the entire portfolio.
Investors can gain much greater exposure to a diversified portfolio by investing in an ETF that tracks an equal-weighted index. The Invesco S&P 500 Equal Weight ETF (NYSEMKT:RSP) tracks the S&P 500 Equal Weight Index. Unlike the S&P 500 or Nasdaq-100, which are capitalization-weighted indices, the equal-weighted index distributes the portfolio evenly across all index constituents.
For example, Microsoft represents 8.8% of the QQQ Trust and 7.1% of the SPDR S&P 500 ETF. It represents only 0.2% of the equal-weighted index. And even if it does better or worse this spring, Invesco will bring it back to 0.2% at the start of each quarter.
By weighting smaller companies more heavily in the index, there is an opportunity to outperform the standard index. While mega-cap stocks have driven the overall performance of the S&P 500 in recent years, smaller companies have produced better historical returns over the long term. The equal-weighted index has delivered annual returns nearly one percentage point higher than the capitalization-weighted S&P 500 since 2003.
With an expense ratio of just 0.2%, you pay the same fees as QQQ. But you get a lot more variety.
3. Align your portfolio with that segment that has historically outperformed
If you’re looking at the Invesco QQQ Trust ETF, you’ll likely be drawn to the Nasdaq 100 Index’s strong historical returns compared to the S&P 500. But the heavy concentration of large-cap growth stocks across the investment universe might also urge you to reconsider. Historically, small-cap and value stocks outperform over the long term. A small-cap value ETF can deliver better future returns than the Invesco QQQ Trust.
The recent outperformance of large-cap stocks and the relatively poor performance of small-cap stocks has created a massive valuation gap between the two market segments. The Nasdaq-100 has a P/E ratio of 29.7x. Even if you just look at large-cap value stocks, they have relatively high P/E ratios. The Vanguard Value ETFfor example, has a P/E ratio of 19.3x.
In comparison, a small cap value fund like that Avantis US Small Cap Value ETF (NYSEMKT: AVUV) has a P/E ratio of just 7.8x. That suggests there’s a lot more upside than downside risk for small-cap value stocks right now.
There are reasons to believe that the gap will close in the future. First, we can usually rely on mean reversion. This is the phenomenon that the future typically resembles the long-term past more than the recent past. Therefore, it is not uncommon for a company, industry, or market segment to experience a period of underperformance after several years of dramatic outperformance.
Additionally, interest rates are one of the biggest factors affecting small-cap stocks. High interest rates can be more of a challenge for smaller businesses than for larger ones. The Federal Reserve has been raising interest rates quickly over the past two years. People are currently considering when interest rates should be reduced. As interest rates begin to decline, investors should see strong performance from small-cap stocks.
All of this means that small-cap value stocks look extremely attractive in the current market environment and may deserve your attention over the Invesco QQQ Trust ETF.
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Adam Levy holds positions in American Century ETF Trust – Avantis Us Small Cap Value ETF and Microsoft. The Motley Fool holds positions in and recommends Microsoft and Vanguard Index Funds – Vanguard Value ETF. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Before you buy the Invesco QQQ ETF, here are 3 others I would buy first, originally published by The Motley Fool