Over the last two years, companies with a focus on AI have led the stock market as the technology has been introduced, improved and deployed for real-world use. Nowhere is this more true than among the so-called Magnificent Seven stocks, a group of mega-cap tech companies that are likely to become leading forces in this new generation of technology.
For investors looking to capitalize on the growth of AI, one ETF may look particularly appealing. Invesco’s QQQ fund is a tech-heavy ETF that includes not only every member of the Magnificent Seven but also a number of other tech companies that could see their earnings rise rapidly in the years to come.
We take a look at QQQ to see whether it could be the best AI index fund to buy now and hold as the AI market grows.
QQQ’s Holdings
Although QQQ may be most appealing for its exposure to AI and other emerging technologies, the fund isn’t tech-exclusive.
QQQ tracks the NASDAQ 100, a group of the 100 largest companies on the NASDAQ outside of the financial sector. As a result, QQQ has a broad mix of companies included in it, though a little over 57% of the fund is invested in large technology companies. The next two largest sectors represented in QQQ are consumer discretionary at just under 20% and healthcare at about 6%.
As with its sectors, QQQ is fairly concentrated when it comes to individual stocks. The top five holdings in the fund are Microsoft (NASDAQ:MSFT), NVIDIA (NASDAQ:NVDA), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Broadcom (NASDAQ:AVGO). Cumulatively, these five stocks alone make up about 35% of the fund’s total holdings.
These massive tech enterprises offer access to much more than just AI. Cloud computing, the growing EV industry, Fintech and streaming are all well-represented by QQQ’s holdings. In this sense, QQQ isn’t just a play on AI but a cross-section of the tech sector as a whole.
QQQ’s Historical Performance
As you might expect, QQQ’s tech-heavy composition has proven very favorable in recent years. In the past three years alone, the strong returns generated by the explosion of AI technology have driven QQQ up by nearly 55%.
On the 10-year timeline, the fund has gained an even more impressive 378%. For comparison, Vanguard’s benchmark S&P 500 fund VOO has returned a significantly more modest 234% over the last 10 years.
QQQ’s Risks & Rewards
Thanks to its concentration on some of the top companies developing and refining AI technology, QQQ is likely to have massive long-term upside. Through 2030, the artificial intelligence market is expected to grow at a compounded annual rate of over 35%, creating huge opportunities for the companies that stake out early leads in the field.
Helpfully for QQQ, its two top holdings are uniquely positioned for success in this market. Microsoft’s relationship with OpenAI and software know-how will likely make it a leader in delivering AI tools to businesses and consumers.
NVIDIA, meanwhile, still enjoys an essentially unchallenged moat when it comes to making the hardware that delivers the computing power needed for AI.
On the downside, QQQ has also proven to be quite volatile. During the tech stock selloff of 2022, for example, QQQ went from trading at almost $400 per share to bottoming out at only about $265. This volatility ties in closely with one of the primary risks of QQQ, namely its high level of concentration among both sectors and individual stocks.
While companies like Microsoft, NVIDIA and Apple have handily led the market in recent years, developments that negatively impact the mega-cap tech stocks disproportionately affect the performance of QQQ.
Another slight drawback to QQQ for some investors could be its comparatively low dividend yield. By excluding financial companies, the NASDAQ 100 tends to screen for growth over the ability to produce high current dividends. On a trailing 12-month basis, QQQ has delivered a yield of just 0.6%.
While some of the large tech companies that make up its top holdings are beginning to put more of a focus on dividends, QQQ is unlikely to reach or exceed the average yield of the S&P 500 or a similar benchmark index anytime soon.
Is QQQ The Top AI Fund to Buy Now?
Despite its inherent volatility and low yield, there’s a lot to like about QQQ as a long-term growth holding. By focusing on large, well-established companies, the fund mitigates many of the speculative risks that come with looking for outsized growth among tech startups.
The companies that mostly make up QQQ are also extremely well-positioned to succeed in the AI race due to their existing market dominance and the cash they have on hand to deploy in building AI infrastructure.
So, while QQQ’s returns could be somewhat lumpy due to its volatile nature and limited diversification, the fund has a high chance of delivering outsized returns over several years to come. With AI investment not showing signs of slowing down anytime soon, QQQ and the stocks that make up the largest part of its holdings are likely to keep turning in a strong performance.
Although limited diversification does present a bit of a risk, it’s also worth keeping in mind that QQQ isn’t entirely made up of tech companies. This fact could help differentiate it from other, even more aggressive ETFs that also track fast-growing tech companies. With consumer discretionary stocks as the second-largest part of the QQQ portfolio, the fund does feature at least some companies that could help to anchor it during downturns that heavily affect the tech sector.
All told, there appears to be a lot to like about QQQ as a long-term holding. Assuming the AI industry grows further and expand at anything like its expected pace over the next five years, QQQ could rise steadily higher as the earnings of its leading companies increase. As such, QQQ is likely a top fund to buy for exposure to AI and other emerging technologies.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
