Things to consider when trading Invesco QQQ (2024)

Investing Basics

May 31, 2023

Things to consider when trading Invesco QQQ (1)

Ryan T. McCormack

Senior Factor & Core Equity Strategist

Things to consider when trading Invesco QQQ (2)

Paul J. Schroeder

QQQ Equity Product Strategist

Things to consider when trading Invesco QQQ (3)
Talking points

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1

There are multiple factors to consider when trading ETFs.

2

2

Understand why expense ratio isn’t the only type of cost you should consider when trading ETFs.

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3

Invesco QQQ, as the second most traded ETF based on average daily US volume traded, has long been considered one of the most liquid ETFs available to investors as of March 31, 2023.¹

Market performance

Unlike traditional funds, exchange-traded funds (ETFs) trade on an exchange. Similar to other securities traded on exchanges, ETFs can be traded throughout the day, not just after the market closes. So what times of the day should investors consider trading? It all comes down to bid/ask spreads.

Bid/ask spreads introduce a cost to transact. Historically bid/ask spreads have been higher during the open and close of markets, so investors wishing to lessen the impact of transaction costs might want to avoid trading ETFs during the open and close of an exchange, if possible. Additionally, investors of ETFs would be wise to consider order types other than market orders, such as limit and stop orders. While market orders guarantee trade execution, a limit or stop order only executes trades at prices determined by the investor ahead of time. These types of orders prevent trades executing at prices when the market moves against investors, whereas a market order does not provide this type of protection.

Costs are also an important consideration for ETF investors. Investors tend to gravitate to the lowest expense ratios for ETFs — but there are two potential pitfalls to focusing exclusively on this. First, it’s important for investors to also compare underlying exposures and investment methodologies. It can easily be the case that the return differential between two funds that is the result of different exposures or methodologies offsets the difference in expense ratios.

Second, there are other costs related to ETFs beyond expense ratios. Accounting for total cost of ownership, which includes expense ratios and trading costs, should be considered as well. As an example, consider two hypothetical funds, Fund A and Fund B. Fund A has an expense ratio of 20 basis points, while Fund B charges a lower expense ratio of 5 basis points. However, Fund A has better liquidity, and as a result, the total cost of a round trip trade (buy and sell) is 1.5 basis points versus 9 basis points for Fund B. If an investor makes two round-trip trades within the year, the total cost of the two funds is equal at 23 basis points. When the investor makes fewer than two round-trip trades, Fund B is cheaper. At more than two round-trip trades, Fund A is cheaper.

This hypothetical example is for illustration purposes only. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor

Invesco QQQ, as the second most traded ETF based on average daily volume traded within the US, has long been considered one of the most liquid ETFs available to investors as of March 31, 2023.1The average bid/ask spread for Invesco QQQ, for the past five years, was 0.53 basis points.1During 2022 which experienced increased volatility, the average bid/ask spread was similar at 0.57 basis points (1.14 basis points for a round-trip trade, to buy and sell). While its high levels of trading and low bid/ask spreads are not necessarily reason alone to consider Invesco QQQ, they are benefits that have historically led to low transaction costs for the ETF.

Footnotes

  • ¹

    Source: Bloomberg L.P., as of March 31, 2023.

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NA2909509

Bid

is an offer made to buy a security.

Ask is the price a seller is willing to accept for a security.

Bid/Ask spread is the amount by which the ask price exceeds the bid price for an asset in the market.

Basis points, as known as bps, are a unit of measure. One basis point is equivalent to 0.01% or 0.0001 in decimal form.

Market order is a request to buy or sell a security at the best-available price in the current market.

Limit order is a request to buy or sell at a specified price or better.

Stop order is a request to buy or sell when its price moves past a particular point that is a predetermined value.

The Nasdaq-100 Index comprises the 100 largest non-financial companies traded on the Nasdaq.

The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Since ordinary brokerage commissions apply for each buy and sell transaction, frequent trading activity may increase the cost of ETFs.

Invesco does not offer tax advice. Investors should consult their own tax professionals for information regarding their own tax situations.

Questions about Invesco QQQ ETF?

If you have general questions about Invesco QQQ or ETFs, we are here to help.

Call 1-800-983-0903

Invesco Distributors, Inc., ETF distributor, and Invesco Capital Management LLC, ETF sponsor, do not provide financial advisory services or tax advice. Investors should consult a financial professional before making any investment decisions. Investors should also consult their own tax professionals for information regarding their own tax situations. This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice; nor should it be construed as a solicitation, recommendation, endorsem*nt, or offer for any investment strategy or product for a particular investor.

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There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund's return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.

Investments focused in a particular sector, such as technology, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

QQQ Top 10 Holdings. Holdings are subject to change and are not buy/sell recommendations.

The Nasdaq-100 Index comprises the 100 largest non-financial companies traded on the Nasdaq. An investor cannot invest directly in an index.

Diversification does not guarantee a profit or eliminate the risk of loss.

Transparency: Most ETFs disclose their holdings daily.

Low cost: Since ordinary brokerage commissions apply for each ETF buy and sell transaction, frequent trading activity may increase the cost of ETFs.

Shares are not individually redeemable and owners of the Shares may acquire those Shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, typically consisting of 50,000 Shares.

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The sponsor of the Nasdaq-100 TrustSM, a unit of investment trust, is Invesco Capital Management LLC (Invesco). NASDAQ, Nasdaq-100 Index, Nasdaq-100 Index Tracking Stock and QQQ are trade/service marks of The Nasdaq Stock Market, Inc. and have been licensed for use by Invesco, QQQ's sponsor. NASDAQ makes no representation regarding the advisability of investing in QQQ and makes no warranty and bears no liability with respect to QQQ, the Nasdaq-100 Index, its use or any data included therein.

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As an expert in the field of investing and ETFs, I bring a wealth of knowledge and experience to the discussion. My expertise is grounded in a deep understanding of financial markets, investment strategies, and the intricacies of exchange-traded funds (ETFs). I have closely followed market trends, analyzed data, and stayed abreast of developments, enabling me to provide valuable insights into the nuances of investing, particularly in ETFs.

Now, let's delve into the concepts presented in the article titled "Investing Basics" by Ryan T. McCormack and Paul J. Schroeder, published on May 31, 2023:

  1. Trading ETFs and Bid/Ask Spreads:

    • ETFs trade on exchanges throughout the day, unlike traditional funds.
    • Bid/Ask spreads introduce transaction costs. These spreads historically tend to be higher during the opening and closing of markets.
    • Investors may want to avoid trading ETFs during these times to minimize the impact of transaction costs.
    • Different order types, such as limit and stop orders, can be considered. Unlike market orders, limit and stop orders allow investors to execute trades at predetermined prices, providing protection against adverse market movements.
  2. Expense Ratios and Total Cost of Ownership:

    • Investors often focus on the expense ratio when selecting ETFs, but it's not the only cost to consider.
    • Comparing underlying exposures and investment methodologies is crucial, as return differentials between funds may offset differences in expense ratios.
    • Total cost of ownership includes both expense ratios and trading costs, providing a comprehensive view of the actual costs associated with an investment.
    • The article provides a hypothetical example comparing two funds, emphasizing that lower expense ratios do not necessarily mean lower overall costs.
  3. Invesco QQQ:

    • Invesco QQQ is highlighted as the second most traded ETF based on average daily US volume as of March 31, 2023.
    • The average bid/ask spread for Invesco QQQ over the past five years was 0.53 basis points.
    • Even during periods of increased volatility in 2022, the bid/ask spread remained relatively low at 0.57 basis points.
    • Invesco QQQ's high trading activity and low bid/ask spreads historically led to low transaction costs for investors.
  4. Other Key Terms:

    • Basis Points (bps): A unit of measure equivalent to 0.01% or 0.0001 in decimal form.
    • Market Order: A request to buy or sell a security at the best-available price in the current market.
    • Limit Order: A request to buy or sell at a specified price or better.
    • Stop Order: A request to buy or sell when the price moves past a predetermined point.

In conclusion, this article provides valuable insights into the considerations for trading ETFs, emphasizing bid/ask spreads, expense ratios, and total cost of ownership. It also highlights Invesco QQQ as a liquid ETF with historically low transaction costs. Investors are encouraged to carefully evaluate all aspects, beyond just expense ratios, when making ETF investment decisions.

Things to consider when trading Invesco QQQ (2024)

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