Invesco QQQ Trust ETF: I'd Buy The Dip Twice (QQQ) (2024)

The Invesco QQQ ETF (NASDAQ:QQQ) is not getting a lot of press these days. With most of the "growth ETF" attention going to ARK Invest funds, QQQ just isn't that hot a topic. This is a shame because it's delivered one of the best total returns of any index ETF in the past year. Over the last 52 weeks, QQQ has risen 39%, according to Seeking Alpha Quant. That beats S&P 500 ETFs like IVV and SPY, along with most actively managed funds.

So, QQQ has had a great 12-month run. It has beaten most other index funds in a one-year time frame, and even thrown off a small dividend to boot. What's not to love?

On the surface, not much. The NASDAQ is home to some of the world's top-performing stocks, and QQQ is among the cheapest and most liquid NASDAQ funds. It certainly looks like a winner. But there are valid concerns about investing in it at today's prices. Many of QQQ's top holdings have gotten quite expensive, and are at risk of revenue deceleration in the year ahead. In some cases, these companies' own CFOs have come right out and told investors that deceleration is coming, and it wouldn't be wise to bet against that. Nevertheless, a big enough dip can make almost anything worthwhile, and the NASDAQ's recent losses have made QQQ a lot more appealing than it was two weeks ago. Accordingly, in this article I'll develop a bullish thesis on QQQ, arguing that it has become a better value in light of its recent dip.

Similar Funds

The first thing we need to establish when evaluating a fund like the Invesco QQQ is what alternatives there are. If we can find funds with the same holdings and the same weightings but with lower fees and higher liquidity, then the alternatives may be better investments. So before I develop my bullish thesis on QQQ, I need to explore these alternatives in detail.

As it turns out, there are not that many. NASDAQ 100 funds are pretty rare. The closest alternative to QQQ is the Invesco NASDAQ 100 ETF (QQQM), which is also an Invesco fund. Nevertheless, there are some similar funds out there, albeit with varying characteristics. Below I will compare QQQ to five of the most similar funds you could buy as alternatives:

So, we see that QQQ has the highest volume and the third lowest fees of the funds listed. However, a few things are worth noting:

1. QLD and TQQQ are both leveraged funds. They're built on the same basic holdings as QQQ but multiplied by the use of leverage. Theoretically, QLD will deliver twice QQQ's return, and TQQQ will deliver three times the return. However, the higher fees for the leveraged funds mean that the multiple isn't quite as high as expected. Also, the leverage effect works in reverse: you lose more money on the downswing. If the NASDAQ dropped 33.33% in a single day, TQQQ would become worthless.
2. QQQM does have a lower fee than QQQ but its volume is also far lower. As a result, QQQ has a much tighter spread than QQQM. QQQ's spread is only 0.01%, while QQQM's is 0.03%. If you're trading frequently (say, daily) you're better off going with the lower spread option even if the fee is greater, because the spread is a bigger factor on a day-to-day basis.
3. VGT is not built on the same stocks as QQQ. It has 354 stocks, including both NASDAQ 100 stocks and financial stocks - which are excluded from QQQ. So you'll find stocks like Visa (V) - which is an NYSE financial - in VGT but not QQQ. Nevertheless, its top 10 holdings are quite similar to QQQ's, and its MER is far lower. So, anybody considering QQQ should at least give VGT a look.

Holdings: Not THAT Expensive

The big concern with the NASDAQ right now is the possibility that it's entering a bubble. We've seen the NASDAQ 100 rally by nearly 50% in just 12 months, and normally, we don't expect gains like that to last forever. However, the NASDAQ is not actually that expensive. According to Invesco, QQQ's holdings had a weighted P/E ratio of 50 on December 31. Since then, the NASDAQ has gone on a rally, followed by a major dip. As of this writing, it was down slightly for the year 2021. At the same time, its largest constituents have gone on to report positive earnings growth for Q4, so the P/E ratio for QQQ's holdings is probably now lower than the 50 you'll see on its fact sheet. By contrast, the NASDAQ had a 189 P/E ratio in March 2000.

Put simply, there's nothing going on right now suggesting that a major crash is coming in QQQ's holdings. Yes, some of them are expensive as measured by the P/E ratio. But nothing close to dot-com bubble territory. Further, far more of the top NASDAQ constituents are profitable today than was the case in 2000.

To examine this more, let's look at some key value and growth metrics for QQQ's top 9 stocks (using GAAP measures):

As we can see, these stocks do have fairly high P/E ratios, however:

• Only one (Tesla) has a P/E ratio above 100.
• All of the stocks for which PEG ratios can be computed have ratios below 2.
• All but one of them have very strong earnings growth rates.

It should be noted that in the table above, we can't calculate meaningful earnings growth or PEG ratios for TSLA because that company wasn't profitable in 2019 - the base 12-month period. It was profitable in 2020, but we'd need a profitable prior year to calculate a meaningful growth rate. In its most recent quarter, TSLA's earnings were up 157% year over year, which is a screaming fast rate.

Risks and Challenges

As we've seen, QQQ is a very high-growth ETF, whose holdings are only slightly expensive despite very strong growth. Add into the mix strong trading volume and low fees, and you've got a recipe for strong total returns. Nevertheless, there are several risks and challenges to be aware of. They include:

• Post-pandemic revenue deceleration. Several of QQQ's top stocks saw their earnings growth accelerate because of COVID-19. Retail stores were closed, so people did more shopping online. This greatly benefitted Amazon and Facebook. When the pandemic ends, retail stores will re-open, so tech stocks' growth will decelerate. It will probably still be positive, but less rapid than before. Facebook's CFO recently told investors that this was a headwind for his company; other tech leaders have said similar things.
• Scenario-specific risk. QQQ will fall more than the S&P 500 in a scenario like the 2000-2002 dotcom crash, where tech stocks lead a decline in the overall market. Between March 2000 and October 2002, the NASDAQ fell 82%. In the same period, the S&P 500 only declined about 40%. This is one very specific scenario in which QQQ faces a lot of downside risk.
• Returns lost to fees. QQQ is a relatively cheap fund, but not the cheapest on earth. You pay 0.2% of NAV each year in fees when you hold QQQ. You pay only 0.15% when you hold QQQM. With VGT - not a NASDAQ-100 fund but fairly close - you pay only 0.1%. Put simply, there are cheaper alternatives to QQQ out there, and they might be worth considering.

The Bottom Line

For me, the bottom line on QQQ is clear:

It's a top NASDAQ fund with incredible long-term returns and a relatively low fee. Its constituents are mostly profitable and not that expensive when you factor in their growth rates. On Thursday, I bought it after it had fallen about 10% from its top for the year. If it fell another 10%, I'd buy it again. There aren't a lot of funds like QQQ out there and when you have the chance to buy it on the dip, it's worth taking it, because the opportunity usually doesn't last long.

A.J. Button