Learn About the QQQ ETF and NASDAQ-100 Index

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QQQQ, QQQ, the Qs—whatever you call it, the product in question is Invesco's exchange-traded fund (ETF) that tracks the Nasdaq 100. The ETF used to trade under the ticker QQQQ, but it has since dropped one of the "Qs," so you'll now find it under the ticker QQQ. The stocks included in this ETF make up the 100 largest companies in the Nasdaq, excluding any financial companies.

QQQ an incredibly popular ETF, making it an important product for all investors to understand. At the end of 2019, QQQ was the second-most traded ETF in the U.S.

What Is the Nasdaq-100 Index?

It's always a good idea to research the underlying index before you consider any index ETF for your investing strategy. The Nasdaq-100 Index (NDX) is a collection of the largest 100 non-financial companies (both domestic and foreign) listed on the Nasdaq exchange.

The index is weighted by market cap, meaning that the more a company is worth, the more shares from that company are included in the index. However, the Nasdaq-100 uses a modified weighting system that prevents any single company from dominating too much of the index. No company can have more than 24% of the weight of the index.

Companies included on the Nasdaq-100 have to be listed for at least two years, except for some companies with a massive market cap that were added after just one year. Also, the stocks need to trade at least 200,000 daily shares, report quarterly and annually, and avoid bankruptcy issues.

The Nasdaq is known as a tech-heavy index, but not all of the companies included are strictly tech-related. The non-financial industries represented include healthcare, retail, transportation, telecommunications, and more. A complete and up-to-date list of the holdings can be found on the Nasdaq website.

Investors will recognize many of the companies included by name, such as Google, Teva Pharmaceuticals, Microsoft, Paychex, and Qualcomm.

Since the Nasdaq-100 doesn't include financial companies, that means it doesn't contain any mortgage or banking securities, even those that are listed on the Nasdaq Composite. If you want to trade Nasdaq's financial companies, you'll want to check out the Nasdaq Financial-100 (IXF).

QQQ and the Nasdaq-100

The index and ETF are rebalanced annually and simultaneously to avoid arbitrage. The price of each security is based on the last trading day of October and the number of shares is based on the last trading day of November.

Difference Between QQQ and Other Major Index ETFs

It's easy to confuse the Nasdaq-100 with the Nasdaq Composite Index (IXIC). QQQ only tracks the 100 companies included in the Nasdaq-100. The full Nasdaq Composite Index includes more than 3,000 symbols. If you want to track that index, consider an ETF like ONEQ, rather than QQQ.

The guidelines for which stocks are included in the Nasdaq-100 (and, therefore, included in QQQ) are different than what you'll find in other common indexes. For one, the exclusion of financial companies is fairly unique. Secondly, indexes like the Dow Jones Industrial Average and the S&P 500 (and the SPDR ETFs that track them) don't have the same market-cap restrictions that limit a company's weight in the index.

Are There Other Qs or NDX Assets for Investing?

While QQQ will most likely meet the needs of an average investor seeking NDX exposure, other products can help advanced traders achieve their goals.

The ProShares Ultra QQQ (QLD) is a leveraged ETF that seeks to emulate twice the daily return of the NDX. For investors looking to short the NDX, there is the ProShares UltraShort ETF (QID), which is an inverse ETF. QID and QLD track the index in different directions, so investors with specific ideas about where the market is heading could use them to seek greater gains.

Leveraged and inverse ETFs both contain complicated (and risky) securities, and they aren't meant to be held long-term. Investors should consider their risk tolerance and timing strategies before buying these products.

You can also trade options on the Qs. Like inverse and leveraged ETFs, options trading is an advanced strategy that comes with higher risks than average investing. However, if utilized correctly, options can be great hedging instruments that create time-constrained exposure to the index and ETF.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.