Nasdaq 100 ETFs

Everyone knows about the S&P 500 index and Dow Jones Industrial Average, but did you know there's another popular benchmark used to track the most notable large-cap U.S. stocks? 

It's called the Nasdaq 100 index, and it tracks 100 of the largest non-financial sector companies listed on the Nasdaq exchange weighted by market cap. If you're looking for mega-cap U.S. stock exposure with a tech sector focus, this index has it all. However, most investors cannot invest directly in an index. 

Outside of using Nasdaq 100 futures or index options, the easiest solution is to buy an exchange-traded fund (ETF) that tracks the Nasdaq 100 index. These Nasdaq 100 ETFs offer affordable, transparent exposure to the returns of the benchmark index. 

Here's all you need to know before deciding whether to invest in a Nasdaq 100 ETF. 

What are Nasdaq 100 ETFs?

An ETF is an open-ended fund that tracks the returns of an underlying basket of assets, which are usually stocks but can also be bonds or commodities. You can visualize them as a mutual fund that trades throughout the day on an exchange, with its own ticker symbol.

A Nasdaq 100 ETF is an ETF that replicates the holdings of the Nasdaq 100 index. Typically, a Nasdaq 100 ETF will purchase and hold all the stocks currently tracked by the Nasdaq 100 index. Investors who purchase shares of this ETF will receive exposure to the returns of the Nasdaq 100 index.

The performance of Nasdaq 100 ETFs will track the index closely but won't always be exact. Things like ETF expense ratios, portfolio turnover, taxes and transaction costs will cause it to lag slightly over time. The difference between the returns of the ETF and its benchmark index is called the tracking error. 

The best Nasdaq 100 ETFs are ones that are highly liquid. They have good daily trading volume and assets under management, boast low tracking errors and charge minimal expense ratios. When looking for the right Nasdaq 100 ETF, investors should keep these points in mind. 

Types of Nasdaq 100 ETFs

Nasdaq 100 ETFs come in many varieties, which can be differentiated by their strategy. Here are some of the common variants you may encounter in the market, along with examples of specific, notable ETFs that fall into each category.

1. Regular: These ETFs provide normal market-cap-weighted exposure to the stocks tracked by the Nasdaq 100 index. If your goal is to match the performance of the index, these ETFs are ideal. They tend to have the lowest costs, smallest portfolio turnover and highest liquidity. Examples include the Invesco QQQ Trust (NASDAQ: QQQ) and its lower-priced version, the Invesco Nasdaq-100 ETF (NASDAQ: QQQM).
   
2. Leveraged: These ETFs provide magnified exposure to the returns of the Nasdaq 100 index. For example, the ProShares UltraPro QQQ ETF (NASDAQ: TQQQ) and the ProShares Ultra QQQ ETF (NYSEARCA: QLD) target a daily return 3x and 2x that of the Nasdaq 100 index respectively. Leveraged ETFs are advanced tools intended for short-term trading and should not be held long-term. In addition, they tend to be quite expensive.
   
3. Inverse: These ETFs target a daily return opposite that of the Nasdaq 100 index. For example, the ProShares UltraPro QQQ ETF (NASDAQ: SQQQ) seeks a daily return -3x that of the Nasdaq 100 index. Like leveraged ETFs, inverse ETFs are short-term trading instruments used by those who wish to short the Nasdaq 100 index.
   
4. Covered call: These ETFs hold the stocks in the Nasdaq 100 index but also sell call options on the portfolio to generate income. By doing so, covered call ETFs sacrifice total returns in exchange for higher-than-average current income. A popular example is the Global X Nasdaq 100 Covered Call ETF (NASDAQ: QYLD). 

Benefits of Nasdaq 100 ETFs

Nasdaq 100 ETFs are a highly popular investment among younger, high-risk investors because of a number of factors, which include:

• Historically strong performance: Thanks to the outperformance of large-cap U.S. stocks and the tech sector, the Nasdaq 100 has outperformed the S&P 500 over the last decade.
• Tax-efficiency: The current companies in the Nasdaq 100 ETF don’t pay high dividends, which makes ETFs tracking this index very tax-efficient. For example, QQQM only has a 30-day SEC yield of 0.73% as of March 15, 2023. 
• High liquidity: Because they track a well-known index, Nasdaq 100 ETFs have some of the highest trading volumes in the ETF industry. Especially popular ETFs like QQQ also have a well-developed options chain for traders looking for enhanced exposure. 

Drawbacks of Nasdaq 100 ETFs

As with all investment products, Nasdaq ETFs have their drawbacks too. These ETFs possess certain characteristics that may not make them ideal investments for all investors. Some of the cons include:

• High volatility: As a 100% stock ETF, Nasdaq 100 ETFs are much more volatile than lower risk investments like bond ETFs. The underlying Nasdaq 100 index has historically suffered deep losses during the 2000 Dot Com Bubble and the 2008 Great Recession. 
• Sector concentration: Currently, the Nasdaq 100 index is heavily concentrated in the technology sector, which exposes it to higher sector-specific risks. For example, 51.15% of QQQM is comprised of technology sector stocks as of March 15, 2023. 
• Under-diversification: The Nasdaq 100 index provides no exposure to international stocks, financial sector stocks or small-cap stocks. Therefore, investors who buy and hold Nasdaq 100 ETFs may miss out on the returns of these assets. 

Compare Nasdaq 100 ETF Brokers

Investors looking to research and choose the best Nasdaq 100 ETFs can use Benzinga to compare the available selections available on the market. This ETF type is highly desirable, so its important to do your research before committing your money to a specific one. Here is a list of brokers that support Nasdaq 100 ETF trading and offer research tools to help investors select the right one.

Frequently Asked Questions