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QQQ: Guide To Trading The Invesco QQQ Trust Series 1


QQQ: Guide To Trading The Invesco QQQ Trust Series 1

QQQ: Guide To Trading The Invesco QQQ Trust Series 1

Vantage Updated Updated Wed, 2024 January 17 05:12

The Invesco QQQ Trust Series 1 (QQQ) is an exchange-traded fund (ETF) that tracks and generally corresponds to the price and yield performance of the Nasdaq 100 Index [1]. The Nasdaq-100 Index that the QQQ tracks is one of the world’s leading large-cap growth indexes. It includes 101 of the largest domestic and international non-financial companies listed on the Nasdaq stock market based on market capitalisation.

This article will help traders understand and trade the QQQ ETF, one of the top four most heavily traded ETFs in the second quarter of 2022 [2].

What is the QQQ Exchange Traded Fund 

The Invesco QQQ ETF was previously known as the PowerShares QQQ Trust ETF. It is also informally called the triple-Qs or the cubes. First introduced on 10 March 1999, traders were able to buy and sell it throughout the market trading hours and it offers traders a way to invest in the 101 largest non-financial companies that are listed on the Nasdaq. It is the 6th most traded ETFs in the fourth quarter of 2022, with an average volume traded of 60.8 million shares [3]

Key statistics you need to know: 

  • Number of stocks included: 102 [4]
  • Gross expense ratio: 0.2%
  • Dividend yield: 0.72%, quarterly distribution [5]

The ETF is also often viewed as a gauge of how the technology sector is doing, due to the stock holdings that are heavily weighted towards large-cap technology companies such as Apple, Microsoft, and Alphabet [6]. However, the QQQ ETF also provides exposure to other sectors such as consumer staples, communication services, information technology, and health care. 

While past performance of an investment can be useful in assessing potential future results, it’s important to note that investment results are not guaranteed and can be affected by various factors such as market conditions, economic events, and geopolitical risks. Therefore, it’s crucial to seek professional advice and conduct due diligence before making any investment decisions, including seeking tax advice to ensure your investment strategy is aligned with your financial goals.

How Does the QQQ ETF Work?

The Nasdaq-100 Index that the QQQ share price follows, is based on a modified capitalisation methodology. This methodology derives an individual stock’s weight in the index based on their market capitalisation. This helps to minimise the influence of the largest companies and balance the index’s constituents, providing greater diversification. 

To do this, Nasdaq analyses the index’s composition quarterly and modifies weightages if distribution requirements are not achieved [7].

The QQQ ETF is also similar to mutual funds in that it includes all the 102 stocks in the Nasdaq-100 Index. However, unlike mutual funds, the QQQ ETF is traded on an exchange like a stock, making it a marketable security. Interested in understanding the differences and similarities between ETFs and Mutual Funds? Click here to explore our article covering the similarities and differences.

When traders purchase the QQQ ETF, they are essentially buying a unit of the current holdings representing a small portion of each stock in the Nasdaq-100 Index.

The top 10 companies in the QQQ ETF

qqq trust fund

The top 10 constituents of the Invesco QQQ ETF make up about 52% of all the QQQ holdings as of 23 September 2022.  Here are the top 10 companies that are within the Invesco QQQ ETF. 

CompanySymbol% In QQQ Portfolio Weight
Apple Inc. AAPL14.05
Microsoft CorpMSFT10.31, Inc.AMZN6.73
Alphabet Class CGOOG3.55
Alphabet Class AGOOGL3.44
Meta Platforms IncMETA2.79
PepsiCo IncPEP2.24
Costco Wholesale CorpCOST1.99
The data for the table above is referenced from the Invesco website [8].
The data are the holdings in QQQ as of 23 September 2022.

These companies have met certain requirements to be included in the Nasdaq-100 index [9]. The requirements are as follows:

  • Must be listed exclusively on Nasdaq exchange
  • Eligible security types include common stocks, ordinary shares, tracking stocks and American Depositary Receipts (ADRs)
  • Must be classified as a Non-Financial company according to the Industry Classification Benchmark (ICB)
  • Must have a minimum average daily trading volume of 200,000 shares.

Where to trade QQQ ETF

The QQQ ETF can be traded on the stock exchange just like any other company stock. 

New traders must first have registered a brokerage account. Once they have funded the trading account, they can begin trading on the brokerage website, platform, or app.

Why trade QQQ ETF

The QQQ ETF has a low expense ratio of 0.2%. The expense ratio is used to measure how much a fund’s assets will be used for administrative and other operating expenses. Investors will know how much they are paying in cost when investing in the fund based on the expense ratio. A low expense ratio of holding the fund can help to amplify an investor’s returns over time.

The QQQ ETF stock holdings are heavily weighted in the technology sectors, taking up 49.56% of the total sector allocation [10]. This includes companies that are constantly developing new technology, such as computer software and electric vehicles. This provides the ETF with the potential for long-term growth as more new technologies are being developed by those companies over time.

By trading the QQQ, traders are also essentially investing in a fraction of all the stocks in the ETF. QQQ is also much more diversified across the growth technology sector. This diversification is able to help mitigate the risk of growth stocks that are generally more volatile.

How to trade QQQ ETF

1. Direct Buying and Selling 

A trader can begin trading QQQ ETF through your brokerage by entering a trade. It is known as a market order. The QQQ ETF is purchased at the current market price when a trader executes a market order. Traders can do some trend analysis before buying CFDs on ETF and selling it at a higher price in the future.

2. Dollar Cost Averaging

Dollar-cost averaging (DCA) is the practice of regularly purchasing a constant quantity of an asset, regardless of the item’s fluctuating price. Traders may consider setting aside a pre-set amount at the end of every month and use it to trade the ETFs. This will also teach traders to accumulate units of the ETF with more discipline.

If you invest the same fixed dollar amount in an ETF every month, the cost of your holdings will be averaged. Traders will accumulate more units when the ETF price is low and fewer units when the price is high. Over time, this approach may be beneficial for traders if they can maintain discipline.

3. Using Options 

Option trading grants traders the right to buy or sell a certain security at a predetermined price or before the contract expires. An option is a contract that is linked to the asset – in this case, the QQQ ETF. When traders purchase the QQQ option, they have the right but not the obligation to trade it. This is known as exercising their option if traders choose to do so.

A call option gives traders the right but not the requirement to purchase the ETF at a specific price by a particular date at the option’s expiration. Traders will have to pay an amount of money called a premium which the call seller will receive. For example, a trader purchases the OCT 250 QQQ call, and in this case, they have the right to purchase the ETF for $250 until the third Friday of October regardless of whether the price of QQQ has increased during the period.

If the price of QQQ does not exceed $250 during this period, the call will expire as traders can purchase the ETF at a lower price than the stated call price. The seller of the call option will keep the premium paid by the trader.

4. Using Contracts for Difference (CFDs)

QQQ ETF can also be traded using CFDs to speculate on the price movements of QQQ. Using CFDs, traders can create trading opportunities in both long and short trades. It is important to note that CFDs are only trading contracts that allow traders to exchange the difference in the value of a financial product that tracks certain underlying assets without involving the actual exchange of the QQQ ETF unit.

When making short trade, the traders will sell the ETF before buying them in anticipation that the price will decline, allowing them to sell it to another trader. Traders making a long trade will purchase the QQQ ETF with the intention of selling it at a higher price in the future.

CFDs are complex instruments and come with high risks primarily due to leverage. You should always seek advice from a qualified expert, read the terms and conditions carefully and consider whether trading CFDs and/or other financial instruments are appropriate for you viewing your experience, objectives, and financial resources, among other circumstances, before committing to trade.

Ready to take your ETF trading to the next level? Explore our comprehensive guide on essential strategies for trading exchange-traded funds (ETFs) as a beginner.

Vantage has recently launched new ETFs for traders to trade. Begin trading the QQQ ETF through CFDs today by opening a live account with Vantage.  

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