One of the most difficult things to do as an investor is to consistently beat the S&P 500. Over the past decade, only about 14% of actively managed large-cap funds have been able to do so.
The secret to the S&P 500's success, and the exchange-traded funds (ETFs) that track the index -- such as the Vanguard 500 S&P ETF -- is that the index uses a much different philosophy than most actively managed funds. The natural instinct of most professional fund managers is to take profits in stocks on the way up so that their positions don't become too large a percentage of their portfolio, in order to manage risk. At the same time, they will often double down on their losers, believing the market is mistaken and that their thesis will eventually play out.
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The S&P 500, on the other hand, as a market-cap-weighted index, takes a different approach. Instead of reducing stakes in its winners, it lets them run, while letting its losers become smaller positions naturally. It's a survival-of-the-fittest mantra that ultimately works because, as a J.P. Morgan study found, most stocks underperform while the market is driven by a handful of megawinners.
The Invesco QQQ Trust: A rare ETF that consistently beats the S&P 500
So, what's the best way to find an ETF that can outperform the Vanguard 500 S&P ETF? The answer is to find an ETF that tracks a market-cap-weighted index tied to growth stocks, which have consistently outperformed value stocks since 2010. And one of the best of the bunch is the Invesco QQQ Trust (QQQ 4.80%), which tracks the Nasdaq-100 index.
NASDAQ: QQQ
Key Data Points
The Nasdaq-100 is a market-cap-weighted index consisting of the 100 largest nonfinancial stocks on the Nasdaq exchange. The index is heavily weighted toward technology stocks, which make up nearly 64% of its holdings.
That percentage is even higher when looking at tech-adjacent companies, since stocks like cloud computing leader Amazon and robotaxi company Tesla are not classified as tech stocks within the index. As tech stocks have grown to become the largest sector of the economy and continue to help push the market higher, the Nasdaq-100 has outperformed.
Over the past 10 years, the Invesco QQQ has generated a 578.6% return, as of the end of April, which isn't that far off from doubling the S&P 500's return over the same decade. Even more impressive is that it has done so consistently, beating the S&P 500 seven of the past 10 years. With tech and growth stocks still poised to lead the market higher, this is a great ETF to own for the long haul.
