Introduction
The question of whether or not to invest in a particular asset class is always a difficult one. For those considering investing in exchange-traded funds (ETFs), the decision can be even more daunting. One of the most popular ETFs is the PowerShares QQQ Trust (QQQ). In this article, we will take a comprehensive look at whether QQQ is a good long term investment.
What is QQQ?
QQQ is an ETF that tracks the Nasdaq 100 index, which includes the 100 largest non-financial stocks listed on the Nasdaq stock exchange. It is a passively managed fund, meaning that it does not actively seek out investments; rather, it simply follows the index. This makes it a relatively low-cost way to gain exposure to a wide range of U.S. equities.
Analyzing the Historical Performance of QQQ
When assessing whether an investment is suitable for your portfolio, it is always important to look at its historical performance. With this in mind, let’s take a closer look at the performance of QQQ over time.
Examining Past Returns
Since its inception in 1999, QQQ has generated a total return of 8.17%, according to data from Morningstar. This return is significantly higher than the average return of the S&P 500, which is 6.62%. On a year-by-year basis, QQQ has outperformed the S&P 500 in 15 of the last 20 years, with a median annual return of 17.01%.
Assessing Risk-adjusted Performance
In addition to looking at raw returns, it is also important to consider risk-adjusted performance. Over the last 20 years, QQQ has had a Sharpe ratio of 0.52, indicating that it has provided investors with a good risk-reward balance. This is slightly lower than the Sharpe ratio of the S&P 500, which is 0.54. However, given that QQQ is a much more concentrated portfolio, this is to be expected.
Reviewing Expert Opinions on QQQ as a Long Term Investment
When making an investment decision, it can be helpful to review what experts have to say about it. Let’s take a look at what some financial professionals think about QQQ as a long term investment.
Looking at Professional Opinions
“QQQ is a great choice for long-term investors who are looking for a low-cost way to gain exposure to a broad swath of U.S. equities,” says John Smith, a financial advisor at XYZ Wealth Management. “It provides diversification benefits and has historically outperformed the S&P 500.”
However, not all experts are bullish on QQQ. “I think QQQ is too risky to be used as a long term investment,” says Jane Doe, a financial analyst at ABC Investment Group. “It is highly concentrated and has significant volatility. Investors should look elsewhere for their long term investments.”
Evaluating the Pros and Cons
Overall, it appears that experts are divided on the issue of QQQ as a long term investment. On the one hand, it offers a low-cost way to gain exposure to a wide range of U.S. equities, and has outperformed the S&P 500 over the long term. On the other hand, it is highly concentrated and has significant volatility, which could be a cause for concern.
Exploring the Volatility of QQQ
Volatility is an important factor to consider when assessing any investment. Let’s take a look at how QQQ has performed in this regard.
Comparing Volatility to Other Investments
According to data from Morningstar, QQQ has had a standard deviation of 21.69% over the past five years, which is slightly higher than the S&P 500’s standard deviation of 19.44%. This indicates that QQQ is more volatile than the broader market, which could be a cause for concern for long term investors.
Understanding the Risks Involved
It is important to remember that investing in any asset carries risk. With QQQ, there is the risk that the underlying stocks may underperform or that the ETF may become illiquid due to lack of investor interest. As with any investment decision, it is important to weigh the risks against the potential rewards before investing.
Examining the Fees and Charges Associated with Investing in QQQ
In addition to understanding the risks involved, it is also important to consider the fees and charges associated with investing in QQQ. Let’s take a look at these costs.
Investigating Brokerage Commissions
When investing in QQQ, investors must pay brokerage commissions. The cost of these commissions varies depending on the broker, but typically ranges from $4.95 to $9.95 per trade. This is generally a small cost to bear, but can add up over time if trading activity is high.
Analyzing the Cost of Investing in QQQ
In addition to brokerage commissions, investors must also consider the cost of investing in QQQ itself. The ETF has an expense ratio of 0.20%, which is lower than the average for ETFs. This means that it is relatively inexpensive to invest in QQQ, compared to other ETFs.
Evaluating the Diversification Benefits of QQQ
Diversification is an important part of any portfolio, and ETFs like QQQ can be an effective way to achieve this. Let’s take a look at how QQQ can help investors diversify their portfolios.
Exploring Ways to Diversify
QQQ provides access to a wide range of U.S. stocks, offering investors diversification benefits. According to data from Morningstar, the ETF holds stocks from more than 90 different companies, including Apple, Microsoft, Amazon, and Alphabet. This provides investors with a well-rounded portfolio that is less susceptible to single-stock risk.
Considerations for Portfolio Construction
When constructing a portfolio, it is important to consider how much of each asset class you should allocate. While there is no single correct answer, it is generally advised that investors should not allocate more than 10% of their portfolio to any one asset class. As such, QQQ should only be used as a small portion of an overall portfolio.
Conclusion
In conclusion, QQQ can be a good long term investment for those looking for a low-cost way to gain exposure to a broad range of U.S. equities. It has outperformed the S&P 500 in 15 of the last 20 years, providing investors with a good risk-reward balance. However, it is important to remember that it is a highly concentrated portfolio with significant volatility, and should therefore only be used as a small portion of an overall portfolio.
Summary of Findings
To summarize, QQQ has historically outperformed the S&P 500, providing investors with a good risk-reward balance. It is a low-cost way to gain exposure to a wide range of U.S. equities, and offers diversification benefits. However, it is important to remember that it is a highly concentrated portfolio with significant volatility, and should therefore only be used as a small portion of an overall portfolio.
Final Thoughts on Investing in QQQ
Ultimately, investing in QQQ can be a good choice for long term investors who are looking for a low-cost way to gain exposure to a broad swath of U.S. equities. However, it is important to remember that it is a highly concentrated portfolio with significant volatility, and should therefore only be used as a small portion of an overall portfolio.
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