Nasdaq 100 ETF: Tech Giants Lead the Way to Outperforming S&P 500
Investing in index funds has long been a popular choice for many investors, and one of the best options available is an ETF that tracks the S&P 500. The SPDR S&P 500 ETF Trust (SPY 0.91%) is an example of an index fund that automatically diversifies your portfolio across 500 of the largest U.S. large-cap stocks. This type of investment has historically provided solid returns for long-term investors, with minimal costs attached.
Notably, even renowned investor Warren Buffett, the CEO of Berkshire Hathaway, has expressed his confidence in the S&P 500, stating that he wants 90% of his wealth invested in this index fund after his passing. Recognizing the potential of the U.S. market, he believes there is no better bet than America.
However, there is another index fund that has shown a track record of outperforming the S&P 500 and seems poised to continue doing so. Meet the Nasdaq 100, comprised of the 100 largest non-financial Nasdaq-listed stocks. Similar to the S&P 500, the Nasdaq 100 uses market-cap weighting, meaning that the most valuable companies hold the greatest influence over the index.
Tech giants play a significant role in the Nasdaq 100, with companies like Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta Platforms, and Tesla contributing significantly to its weighting. These companies, along with other tech stocks, have propelled the Nasdaq 100 to deliver excellent returns for investors in recent years.
Over the past decade, the Nasdaq 100 has outperformed the S&P 500, even when considering dividends reinvested. For example, if you had invested $10,000 in the Nasdaq 100 ten years ago, it would be worth approximately $49,000 today. In contrast, investing the same amount in the S&P 500 would yield just under $30,000. This impressive performance makes the Nasdaq 100 an attractive investment option.
To tap into the Nasdaq 100’s outperformance, investors can consider the Invesco Nasdaq 100 ETF (QQQM 1.20%). This ETF, similar to the S&P 500 index funds mentioned earlier, boasts a low expense ratio of 0.15%. By investing in this ETF, investors can focus on the best-performing companies represented in the Nasdaq 100 and leave behind underperforming sectors.
What makes the Nasdaq 100 consistently outperform the S&P 500? One reason lies in the success of its top holdings, which often comes at the expense of companies outside the tech sector. As tech stocks mature and disrupt traditional industries, sectors like financials, industrials, and energy have faced challenges in keeping up with the pace of technological innovation.
For instance, the rise of electric vehicles has impacted traditional car manufacturers and the energy sector. The fintech industry, including Apple Pay and PayPal, has posed challenges to traditional financial institutions. Companies like Amazon have disrupted traditional retail, while digital media companies have displaced linear media options. Even the commercial real estate sector has been impacted by remote work facilitated by tech companies like Zoom.
Looking forward, the next major disruption in the tech sector could come from generative AI technologies. It makes strategic sense to invest in the stocks most likely to emerge as winners in this field, and that is where the Magnificent Seven group, leading the Nasdaq 100, come into play.
In conclusion, while investing in an S&P 500 index fund has proven to be a sound decision for long-term investors, the Nasdaq 100 offers the potential for even greater returns. With its focus on tech giants and their disruptive capabilities, this index fund has consistently outperformed the S&P 500. For investors seeking to capitalize on the innovation and growth within the tech sector, the Invesco Nasdaq 100 ETF presents a compelling opportunity.
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