3 ways to play Nasdaq with ETFs: the best Nasdaq funds

The Nasdaq stock index has seen phenomenal growth over the past decade, increasing an average of 14.2% per year and turning an initial investment of $10,000 into more than $37,700. And investors have easy ways to surf the Nasdaq using exchange-traded funds (ETFs).

Here are three ways to play Nasdaq using ETFs and what to watch out for.

3 ways to invest in Nasdaq with ETFs

Investors have several ways to use their funds to invest in the Nasdaq, including ways to short the index and even increase the total return of the index through a Leveraged ETF.

1. A Nasdaq index fund

The easiest way to participate in Nasdaq is to own a simple Nasdaq fund. This fund attempts to mimic the performance of the Nasdaq-100 Index, which is a collection of the 100 largest non-financial stocks traded on the Nasdaq exchange.

The key fund here is the Invesco QQQ Trust (ticker: QQQ), which charges a spending rate of 0.20 percent per year, or $20 for every $10,000 invested. What is striking about this fund is that it has significantly outperformed its target index, gaining an average of 18.3% per year over the past decade, compared to 14.2% on average per year for the ‘hint.

If you want an even cheaper fund – and there’s no good reason not to – then you can opt for the Invesco Nasdaq 100 ETF (QQQM). It offers the same setup as the first fund but only charges 0.15% per year, or $15 for every $10,000 invested. Although the fund has only existed since 2020, it shows similar performance to its larger cousin.

Mutual funds that track the Nasdaq are also among the the best performing mutual fundsAlso.

2. A leveraged Nasdaq index fund

If the returns of a standard Nasdaq fund simply aren’t high enough for you, you have the option of investing in a leveraged Nasdaq ETF. This type of fund has stocks but also a kind of derivative known as index swaps which allow the fund to rise faster than the index itself.

A key name here is the ProShares UltraPro QQQ (TQQQ), which targets three times the daily performance of the Nasdaq-100 Index. The fund charges 0.88% of its assets annually, but the performance is well worth the extra fee. The fund has generated an average annual return of 36.8% over the past decade, but not without some ups and downs.

This total return is therefore ultimately approximately twice that of the base Nasdaq fund.

3. A short Nasdaq index fund

If you’re looking to profit from the decline in the Nasdaq index – hey, it happens from time to time, despite the outrageous performance of the last decade – then you can use a Short ETF. A short ETF generally performs inversely to the underlying index, increasing as the index falls. To achieve this kind of performance, these funds use a type of derivative called an index swap.

The story continues

One of the most popular names here is the ProShares UltraPro Short QQQ (SQQQ), which targets three times the inverse of the daily performance of the Nasdaq-100 Index. In theory, if the Nasdaq fell 1 percent, then this fund would rise 3 percent. Given the Nasdaq’s sharp rise over the past decade, it’s no wonder this fund has fallen an average of 52.5% per year.

This decline is not only due to the outperformance of the index but also the nature of the fund itself, which must continually maintain costly derivative positions to achieve its objective. The fund’s fees are 0.95 percent, which is no different than similar short ETFs.

What is the Nasdaq-100 index?

The Nasdaq-100 Index is a collection of the 100 largest non-financial stocks traded on the Nasdaq exchange. The index includes the biggest names in the world of technology, including those in the 7 magnificent actionslike Microsoft, Alphabet, Amazon, NVIDIA and Apple.

Since the index contains many the biggest technology stocksThe index is a good measure of the performance of the technology sector as a whole, and it is often used as shorthand for the technology sector.

Technology stocks are regularly part of the the best performing stocks on the market on a monthly basis.

Risks of ETFs and leveraged funds

While ETFs can be a great way to play the Nasdaq Index, they are not without risks and drawbacks.

• You will only get the returns if you hold: Traders who actively buy and sell are unlikely to benefit from the index’s strong long-term performance. Actually, active investing tends to underperform passive investing. So if you want to take advantage of Nasdaq returns, the best approach is to buy and hold a fund.

• Monitoring risk: Any fund that tracks an index may not accurately replicate its performance. This is the case for these Nasdaq funds, where the core funds significantly beat the performance of the Nasdaq by more than 4 percentage points per year. But this is also true for leveraged and short funds, which lead to increased derivatives costs.

• Structural costs: Leveraged and short funds have additional derivatives costs that significantly dampen the performance of these funds. These derivatives must be reestablished regularly in order to achieve the fund’s objective.

• Volatility: Leveraged and short funds can generate significant volatility – which is part of the problem – but if you invest in these funds, you need an iron stomach to take them out.

Although Nasdaq is a popular technology fund, investors looking for greater diversification can look to the best S&P 500 index fundswhich include major tech stocks and hundreds more.

Conclusion

Investors looking to benefit from the performance of the technology-heavy Nasdaq Index can use a variety of funds, depending on how they expect the index to perform. Investors should also consider working with one of the best brokers for ETF investment for a wide range of functionalities.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. Furthermore, investors are advised that past performance of investment products is not a guarantee of future price appreciation.

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