Key Points
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The Nasdaq-100 index features the top growth stocks in the world, and tracking it has resulted in significant returns for long-term investors.
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Since the tariff pause back in April, both the Nasdaq and the S&P 500 have soared more than 25%.
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Heightened valuations, however, could mean more limited returns in the short term.
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Investing in the top growth stocks on the Nasdaq stock exchange has generally been a good move for investors. And by tracking the Nasdaq-100, an index of the most valuable nonfinancial stocks on the exchange, investors can easily get exposure to the best and brightest growth stocks.
But with valuations soaring this year and the Nasdaq Composite and S&P 500 index hitting record levels, is it still a no-brainer option to invest in an exchange-traded fund (ETF) that tracks the Nasdaq-100? Or is now the time to shift away from the index and perhaps pivot into safer investments?
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Why investing in the Nasdaq-100 makes sense for long-term investors
If you’re a long-term investor who just wants to add an ETF to your portfolio that you can forget about, the Invesco QQQ Trust (NASDAQ: QQQ) can be a compelling option. It tracks the Nasdaq-100, and in just the past five years it has more than doubled in value and outperformed the overall market. Since the ETF tracks an index of top stocks, it means that you don’t have to worry about keeping tabs on how individual stocks are doing; the Nasdaq-100 will automatically adjust and add companies that are rising in value while also dropping ones which are no longer among the top 100.
This strategy can make the ETF a good no-nonsense means of investing in many of the best growth stocks in the world. There’s simply not much of a substitute for investing in growth stocks. While safer options can result in less volatility in a given year, you’re likely to perform far better by targeting the fastest-growing companies in the world.
Over the past decade, the S&P 500 has generated total returns (including dividends) of more than 260%. While that’s impressive, the Invesco QQQ Trust is up by over 450% over that same period. It has been the better investment by far.
Should you be worried about the market being at record levels?
One reason you might be thinking twice about investing in growth stocks or tracking the Nasdaq-100 index right now is that stocks are around record levels. Both the Nasdaq and the S&P 500 have hit record highs this year, despite question marks looming about what’s ahead for the economy.
Since April 8, which is around the time “reciprocal tariffs” were paused, the S&P 500 has rallied by nearly 30% while the Nasdaq is up close to 40%. There has been a lot of economic volatility, and there is definitely the danger that if investors become concerned about tariffs, stocks could be headed back to the lows they reached in April.
^SPX data by YCharts
I certainly wouldn’t rule out a potential decline in the market in the near future, and this is a risk for investors to consider, especially in light of how hot stocks have been in recent months.
Is it still a good time to invest in the Nasdaq-100?
If you’re investing for the long term, i.e., five years or more, then it can still be a good option to invest in a fund such as the Invesco QQQ Trust. There is always going to be risk and uncertainty when you have exposure to growth stocks, particularly tech growth stocks, where valuations can become enormous. However, even if there is a bad year for the markets in the near future, it’s likely to recover, just as it always has. As long as the U.S. economy continues to grow, the S&P 500 is likely to rise in value as well. And with the Nasdaq-100 focused on growth, it may continue to outperform.
If your investing time frame is shorter than five years, then it may be a good idea to focus on safer stocks to preserve your capital or even to put money into bonds. But if you’re in it for the long haul, then it can still be a no-brainer move to invest in the Nasdaq-100.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
