1 Technology ETF to Buy Hand Over Fist and 1 to Avoid
Investing in technology stocks can be confusing, complex, or both. That's where exchange-traded funds (ETFs) can be helpful. Instead of sifting through hard-to-understand technology companies, a technology-focused ETF can make life easier by offering investors instant portfolio diversification.
But not all ETFs are created equal. Some have performed better than others over the years. Here is one blue-chip technology ETF investors should consider buying and holding and another that's seemingly 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 largest companies in the Nasdaq Composite. The "Magnificent Seven" stocks, big technology companies at the forefront of today's artificial intelligence (AI) boom, are prevalent throughout the fund's top 10 holdings. About 59% of the ETF is built with technology stocks, followed by exposure to consumer discretionary stocks at 18% and further diversification from there.
Below, you can see the fund has handily outperformed the broader Nasdaq Composite over the past decade. Successful companies generally grow larger over time, ascending to the top of the Nasdaq, where they get put into the Invesco QQQ. In other words, the ETF is almost like a rolling bucket of the Nasdaq's most prominent and brightest star companies.
QQQ Total Return Level data by YCharts.
Nobody can guarantee that the Invesco QQQ will continue to perform this well -- and it certainly isn't risk-free. The underlying stocks could languish under overheated valuations, causing the entire ETF to underperform.
However, the blue-chip technology stocks in this ETF are often well-established (sometimes dominant) and flush with cash to invest in growth and return profits to shareholders. That sets investors up nicely for the long term and helps explain the Invesco QQQ ETF's excellent history.
Avoid this ETF: Ark Innovation ETF
The Ark Innovation ETF (NYSEMKT: ARKK) has taken an entirely different investing approach despite having a similarly heavy concentration in technology stocks. Founded and managed by Cathie Wood, the ETF is innovation-focused and bets on up-and-coming businesses in emerging industries. It became famous several years ago after a successful large bet on Tesla. Some of its top holdings expose the company to other growth industries, including fintech, digital ads, and AI.
Investors must know that this doesn't necessarily mean the fund targets large or established technology stocks. The willingness to take riskier swings has made the fund far more volatile. The fund outperformed the broader Nasdaq Composite by a tremendous margin in a low-interest-rate environment that favored growth stocks but has underperformed since interest rates rose a few years ago.
So, why avoid the Ark Innovation ETF today? There are a couple of problems. First, inflation hasn't come down as much as officials have hoped. Wall Street entered the year believing that several rate cuts could be possible, but rates have remained the same thus far in 2024. That could continue pressuring the types of stocks the ETF holds.
Secondly, the fund is actively managed, which leaves room for bad decisions that could negatively impact returns while charging a higher expense fee of 0.75% (versus 0.2% for the Invesco QQQ).
Wrapping things up
Investors are looking at two different styles of ETFs. The passively managed Invesco QQQ tracks an index, while the Ark Innovation ETF actively shuffles its holdings.
The Invesco QQQ might not have as explosive an upside potential as the Ark Innovation ETF, but performing companies grow and float to the top of the ETF. Meanwhile, the Ark Innovation ETF is more volatile and has dramatically underperformed in this economic climate. Since it's actively managed, the fund managers must pick the right stocks and buy and sell them at the right time.
Ultimately, the Invesco QQQ Trust ETF is more straightforward and has created sustained investment returns, making it the better buy.
Should you invest $1,000 in Invesco QQQ Trust right now?
Before you buy stock in Invesco QQQ Trust, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Invesco QQQ Trust wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $652,342!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of May 13, 2024
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
