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The enthusiasm surrounding Invesco QQQ Trust QQQ, the exchange-traded fund built around a hand-picked group of the 100 largest nonfinancial stocks listed on the Nasdaq exchange, is easy to understand. Thanks to its hefty exposure to the technology and technology-related stocks that have dominated the market, the fund has racked up chart-topping returns over the trailing 10- and 15-year periods. As a result, the fund has collected about $75 billion in net inflows over the past five years, which ranked third among the bestselling funds over that period.
I’ve heard from many investors who are wondering about the fund from a portfolio perspective, asking if it makes sense to own both Invesco QQQ and a broad market index fund, such as Vanguard S&P 500 ETF VOO. In a nutshell, the answer is probably not. In this article, I’ll take a closer look at why.
Holdings Overlap
The two benchmarks are fundamentally different in some ways. The Vanguard S&P 500 ETF is more of a true index fund, meaning that it follows a rules-based methodology and aims to track its benchmark as closely as possible. (Purists might quibble that the S&P 500 isn’t a completely unadulterated market-cap-weighted index, as its constituents must also meet other criteria, such as trading volume, liquidity, a positive earnings number based on the sum of the past four quarterly financial statements, and positive earnings for the most recent quarter.)
Invesco QQQ follows a much looser approach. First, holdings must trade on Nasdaq, which isn’t a fundamental investment factor but merely a product of wherever the company’s C-suite decides the shares should trade. Second, the committee that oversees the Nasdaq-100 Index has made several adjustments to its constituent weightings to avoid overly large concentrations in stocks such as Microsoft MSFT, Apple AAPL, Alphabet GOOG, and other members of the “Magnificent Seven.”
Notwithstanding these differences, there’s a considerable amount of overlap in holdings for the two funds. The exhibit below shows 10 of the largest holdings that appear in both funds. Both are dominated by stocks that have led the market over the past decade or more, including all of the Magnificent Seven as well as Broadcom AVGO and Costco COST.
Top 10 Shared Holdings: Invesco QQQ Trust vs. Vanguard S&P 500 ETF
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There’s a lot of overlap in the rest of the two funds’ holdings as well. As shown in the exhibits below, only about 5% of Invesco QQQ’s holdings (based on their asset weightings within the portfolio) aren’t also held by Vanguard S&P 500 ETF. Because Vanguard S&P 500 ETF is more broadly diversified, about two thirds of its portfolio doesn’t appear in Invesco QQQ.
Holdings Overlap: QQQ vs. VOO
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Holdings Overlap: VOO vs. QQQ
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Similar Performance, but More Downside Risk
Not surprisingly, similar holdings mean similar performance. Over the past three years, Invesco QQQ had a correlation of 0.92 when measured against major index funds such as Vanguard S&P 500 ETF. In other words, the Nasdaq-100 Index doesn’t usually offer significant diversification benefits.
While generally moving in line with the overall market, Invesco QQQ has been subject to a greater level of drawdown risk. The exhibit below shows its performance in several previous market corrections. During the tech, media, and telecom correction that started in March 2000, for example, it suffered cumulative losses of nearly 77%, compared with about 33% for the overall equity market.
Performance in Market Drawdowns (Total Return %)
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Invesco QQQ’s heavy level of exposure to technology- and communications-related stocks—which often totals more than 60% of assets—is the main culprit. And its exposure to chip stocks such as Nvidia NVDA in particular can be a liability at times. During the DeepSeek-driven market selloff in late January, for example, the fund suffered nearly a 3% one-day loss, roughly twice that of the overall equity market.
Valuation risk is another reason behind Invesco QQQ’s more pronounced vulnerability on the downside.
As shown in the exhibit below, Invesco QQQ’s holdings trade at steeper valuations on every traditional valuation measure. Its underlying holdings were also trading at a 9.2% premium to Morningstar’s estimates of their underlying fair value as of Feb. 6, compared with about 7.6% for the Vanguard fund.
Portfolio Valuation Statistics
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Conclusion
At the end of the day, Invesco QQQ Trust doesn’t offer a lot of diversification benefits to investors who already own a broad-based equity index fund. Instead, the fund is better thought of as an active bet on the ongoing dominance of technology and artificial intelligence stocks. But how long they’ll continue to dominate is anyone’s guess.
The author or authors do own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.