The power of diversification

Nothing is ever certain in investing. There are some investment principles, though, that tend to hold true in many environments. For example, if you want higher returns, the trade-off is usually accepting more risk and volatility.

Another important investment principle is the concept of diversification. We’ve all heard the adage of not putting all your eggs in one basket.

But how can we really know that diversification is actually powerful? And how can it help individual investors?

While diversification may help smooth a portfolio’s fluctuations, it does not eliminate risk. In other words, diversification may not protect you from a loss when markets are falling.

Time to unfurl the sector quilt charts

Sector “quilt” performance charts are a helpful visual for understanding the logic behind diversification. The charts showcase the annual performance of various sectors, ranked by performance, over time.

What’s quickly apparent is that the sector leaders and laggards tend to change year to year. One year, technology might set the pace for the market, while healthcare takes over the lead the next year, and so on. Unless you have a crystal ball, investing in a variety of sectors may help you weather the ups and downs of individual industries like consumer discretionary, industrials, and telecommunications.

Individual sectors perform differently because each one has its own economic cycles, costs, customers, regulators, and other unique factors.

Still, sector diversification doesn’t mean investors can’t lose money in a declining market. During the economic shocks of the 2008 financial crisis and 2020 pandemic outbreak, all sectors fell.

QQQ holds more than just tech

Although Invesco QQQ ETF held 58.9% of its exposure in the technology sector as of March 31, 2024, it also invests in innovative companies outside of tech.¹

While technology clearly comprises a significant portion of QQQ’s portfolio, it also allocates to sectors such as consumer discretionary, healthcare, and industrials. Other sectors that QQQ may hold include telecommunications, consumer staples, basic materials, utility, energy, and real estate.

Under the hood, QQQ tracks the Nasdaq-100® Index, which includes the 100 largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. Therefore, QQQ doesn’t hold banks and financial-services companies.

Innovation across sectors and subsectors

QQQ offers some sector diversification beyond tech – and within tech the exposure spans several subindustries like chips and software. In short, the ETF lets investors get exposure to some of the most innovative and disruptive companies shaping the future.

From artificial intelligence (AI) and advanced healthcare to semiconductors, QQQ's holdings span a wide array of industries. Investors can capitalize on the growth potential of these themes without choosing individual stocks.

• The AI revolution: Widespread adoption of generative AI has opened investors’ eyes to the potential of this burgeoning technology. AI is currently transforming some of the largest companies in the Nasdaq-100, including leading semiconductor producer NVIDIA, software giant Microsoft and Google parent Alphabet.
• Robotic surgery: Within healthcare, medical instruments are a hotbed of innovation in areas like robotic surgery. Intuitive Surgical, a QQQ holding, is known for its next-generation Da Vinci system that helps doctors perform minimally invasive surgeries in thousands of hospitals worldwide. Elsewhere in healthcare, QQQ holds biotechnology companies like Amgen, Gilead, and Moderna that are leading the way in biotech breakthroughs.
• Semiconductors: Chips, another key subsector within QQQ, are the backbone of modern technology, powering everything from smartphones to data centers. With the increasing demand for computing power and connectivity, semiconductor companies within QQQ's portfolio like NVIDIA, Broadcom, Intel, and Qualcomm are poised to benefit from potential long-term growth trends.
• Streaming and digital: QQQ provides exposure to companies disrupting the leisure and entertainment sector, catering to changing consumer preferences and lifestyles. As the world becomes increasingly interconnected and digital, companies offering entertainment and leisure experiences are well-positioned to capitalize on evolving consumer habits. Several QQQ holdings are among the leading players in streaming, including Amazon (Prime Video), Apple (Apple TV) and Netflix.

Key takeaways

• Holding a diversified mix of sectors is designed to reduce the overall volatility of a portfolio, although it doesn’t guarantee investors won’t lose money in down markets.
• While some investors think of Invesco QQQ as a technology fund, it offers exposure to a range of sectors beyond tech.
• Moreover, QQQ holds innovative companies that are using technological advancements in healthcare, entertainment, and other sectors.