You Can Do Better Than the S&P 500. Buy This ETF Instead.

When investors talk about the stock market, they are most likely focused on the S&P 500. This index that tracks the 500 largest profitable publicly traded enterprises in America is a bellwether for how the market is performing. Naturally, it draws a lot of attention as a possible investment opportunity.

In the past 10 years, the S&P 500 has produced a strong total return of 238%. However, you can do better than this. Just consider buying the Invesco QQQ Trust (QQQ 1.03%) instead.

Unique exposure to growth and innovation

The Invesco QQQ Trust is an exchange-traded fund (ETF) that tracks the performance of the Nasdaq-100 index. This includes the 100 biggest non-financial businesses that trade on the Nasdaq Stock Market.

It’s important for prospective investors to understand the composition of this ETF. The Invesco QQQ Trust leans heavily toward the information technology sector, which makes up 52% of its holdings.

Unsurprisingly, the so-called “Magnificent Seven” stocks have a huge weighting in the portfolio. These massive companies are known to be leaders in their respective industries with a focus on innovation and disruption. It also helps that they benefit greatly from powerful secular trends, such as cloud computing, streaming entertainment, digital payments, digital advertising, and artificial intelligence.

The potential for huge returns is why investors want access to the tech sector. But because of how difficult it can be to pick individual winners, owning the Invesco ETF allows one to avoid having to choose single stocks. Gaining broad-based exposure seems like the right move, as it has worked well in the past.

Tremendous past performance

The S&P 500’s trailing-10-year performance is noteworthy, but it doesn’t come close to the Invesco QQQ Trust. In the past decade, it has generated a monster total return of 442%, which translates to an annualized gain of 18.4%. This means that a $10,000 investment in July 2014 would be worth an outstanding $54,200 today. This absolutely crushes what the S&P 500 was able to produce. And it undoubtedly outperforms the majority of active fund managers out there.

Besides the tech sector, communication services (15% of the holdings) and consumer discretionary stocks have a meaningful representation (13%). For most of the past decade, the economy experienced low interest rates and minimal inflationary pressures. This created a favorable backdrop for these companies, and their stock prices, to shine.

It’s worth pointing out, though, that since the start of 2023, the Invesco QQQ Trust has soared 83%. Even in an environment where interest rates haven’t been this high since right before the Great Recession, this ETF has performed remarkably well.

You might assume that it costs an arm and a leg to own this fund. But that’s just not true. The Invesco QQQ Trust carries an expense ratio of just 0.2%. For every $10,000 invested, only $20 goes toward servicing the annual fee. That means you get to keep more of your money over time.

Temper expectations

As of this writing, the Invesco QQQ Trust trades 4% below its peak price, which was established earlier in July. There’s chatter on Wall Street that capital is rotating from the massive tech companies to small-cap stocks. This might help explain the ETF’s recent breather.

Nonetheless, you’re probably wondering if now is still a good time to invest in the ETF. For what’s it’s worth, I don’t think forward returns are going to resemble the past. There’s a good chance that inflation, and therefore interest rates, are higher over the next decade than they were in the past 10 years. And this could prove to be a headwind to generating outsize returns.

But if you’re a long-term investor, the Invesco QQQ Trust should reward you for many years and decades. It’s all about being patient and staying the course.