ETFs
1 Phenomenal ETF That’s Almost Bound to Beat the S&P 500
Over the past 10 years, the S&P500 the index generated a total return of 240%. This means that an investment of $10,000 in May 2014 would be worth $34,000 today. This is certainly a respectable gain that should please any investor. This broad index of America’s largest and most profitable companies gets a lot of attention because it is the most widely followed barometer for gauging stock market performance.
However, there is one in full swing exchange traded fund (ETF) which has beaten the S&P 500 in the past and is almost destined to continue to do so over the long term.
A story of outperformance
THE Invesco QQQ Trust (NASDAQ: QQQ) has produced a total return of 460% over the past 10 years, easily crushing the gains of the S&P 500. That same $10,000 would currently leave you with a balance of $56,000. This is a huge gap that we cannot ignore. In fact, this outperformance remains true even when looking back at the last three and five year periods.
So, you may be wondering what exactly QQQ is. This is an ETF that contains the 100 largest non-financial companies traded in the market. Nasdaq exchange. Of the QQQ stocks, 59% are in the technology sector, while 18% are in the consumer discretionary sector. It is truly an investment vehicle that gives its owners exposure to innovative and disruptive companies.
It’s worth mentioning that the “Magnificent Seven” components hold a huge weight in the QQQ, 43% of the ETF’s entire assets to be exact. These industry-leading companies benefit from powerful tailwinds, such as cloud computing, digital payments, artificial intelligence, digital advertising and streaming entertainment.
The mix helps explain why the average QQQ company has likely experienced annualized revenue growth over the past five or ten years, at a much faster rate than the typical S&P 500 company. Higher sales can lead to higher profits, which can lead to higher stock prices.
Other factors to consider
It is very easy for investors to believe that past performance will repeat itself. But it’s not always the case. While QQQ certainly has qualities that point to continued outperformance, such as its technology focus and higher growth potential, there are other factors to consider.
The stocks are more expensive than average, as evidenced by the average price-to-earnings ratio of 35. Some less optimistic investors might believe that many of QQQ’s heavily weighted stocks are expensive and their valuations will soon decline. . While that may be the case, I think over very long periods of time it has proven to be a lucrative gamble to focus on some of the most innovative and forward-thinking companies.
The story continues
Additionally, with QQQ, there is no need to pick a single winner within a specific technology trend. Owning 100 different stocks provides a broad level of exposure that allows you to capture winners.
I also think macroeconomic factors could play a role. Technology and consumer discretionary stocks generally do well in robust economic environments. With high interest rates and persistent inflationary pressures, one could argue that we are far from this type of favorable environment. This may mean that QQQ’s returns for the foreseeable future will disappoint investors.
I will answer this by saying that the QQQ has actually outperformed the S&P 500 and the Nasdaq Composite since the start of 2023. Thus, its monster gain occurred in an uncertain macroeconomic context.
I see no compelling reason to believe that QQQ won’t continue to beat its most popular benchmark over the next five to ten years.
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Neil Patel and its clients have no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
Prediction: 1 Phenomenal ETF That’s Almost Bound to Beat the S&P 500 was originally published by The Motley Fool