ETFs
1 Tech ETF to Buy Hand Over Fist and 1 to Avoid
Investing in tech stocks can be confusing, complex, or both. This is where exchange-traded funds (ETFs) can help. Instead of sifting through difficult-to-understand technology companies, a technology-focused ETF can make life easier by providing investors with instant portfolio diversification.
But not at all AND F are created equal. Some have performed better than others over the years. Here’s a top tech ETF that investors should consider buying and holding, and another that seems to have lost its touch after bursting into the spotlight during the pandemic.
Buy this ETF: Invesco QQQ ETF
THE Invesco QQQ ETF (NASDAQ: QQQ) is built with 100 of the world’s largest companies. Nasdaq Composite. THE “Magnificent Seven” shares, large technology companies at the forefront of the current boom in artificial intelligence (AI), are prevalent in the fund’s top 10 holdings. About 59% of the ETF is technology stocks, followed by exposure to consumer discretionary stocks at 18% and further diversification from there.
Below you can see that the fund has significantly outperformed the broader Nasdaq Composite over the past decade. Successful companies typically grow over time, reaching the top of the Nasdaq, where they are incorporated into the Invesco QQQ. In other words, the ETF is almost like a rolling bucket of Nasdaq’s biggest and brightest star companies.
QQQ Total Return Levels Chart
No one can guarantee that Invesco QQQ will continue to perform as well as it does – and it is certainly not without risk. The underlying stocks could languish due to overheated valuations, causing the entire ETF to underperform.
However, the blue-chip tech stocks in this ETF are often well-established (sometimes dominant) and flush with cash to invest in growth and return profits to shareholders. This prepares investors for the long term and helps explain the Invesco QQQ ETF’s excellent track record.
Avoid this ETF: Ark Innovation ETF
THE Arche Innovation ETF (NYSEMKT: ARKK) has taken a completely different investment approach despite an equally heavy concentration in technology stocks. Founded and managed by Cathie Wood, the ETF focuses on innovation and bets on emerging companies in emerging sectors. He became famous several years ago after a successful bet on You’re here. Some of its top holdings expose the company to other growth sectors, including fintech, digital advertising and AI.
Investors should be aware that this does not necessarily mean the fund targets large or established technology stocks. The desire to make riskier decisions has made the fund much more volatile. The fund significantly outperformed the broader Nasdaq Composite in a low interest rate environment that favored growth stocks, but has underperformed since interest rates rose a few years ago.
The story continues
^NACTR Chart
So why avoid the Ark Innovation ETF today? There are some problems. First, inflation has not fallen as much as the authorities had hoped. Wall Street started the year thinking multiple rate cuts might be possible, but rates have remained the same so far in 2024. This could continue to put pressure on the types of stocks the ETF owns .
Second, the fund is actively managed, leaving room for poor decisions that could negatively impact returns while charging a higher expense fee of 0.75% (compared to 0.2% for the Invesco QQQ ).
Wrap things up
Investors consider two different styles of ETFs. The passively managed Invesco QQQ tracks an index, while the Ark Innovation ETF actively mixes its holdings.
The Invesco QQQ may not have as explosive upside potential as the Ark Innovation ETF, but successful companies grow and float to the top of the ETF. Meanwhile, the Ark Innovation ETF is more volatile and has significantly underperformed in this economic climate. Since it is actively managed, fund managers must select the right stocks and buy and sell them at the right time.
Ultimately, the Invesco QQQ Trust ETF is simpler and has created sustained investment returns, making it the better buy.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Tesla. The Motley Fool has a disclosure policy.
1 Tech ETF to Buy Hand Over Fist and 1 to Avoid was originally published by The Motley Fool