3 Ways to Play Nasdaq ETFs: Top Nasdaq Funds

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The Nasdaq stock index has had a phenomenal run over the past decade, rising an average of 14.2 percent annually and turning an initial $10,000 investment into more than $37,700. And investors have some easy ways to participate in the Nasdaq with exchange traded funds (ETFs).

Here are three ways to play ETFs on the Nasdaq and what to look out for.

3 Ways to Invest in the Nasdaq with ETFs

Investors have several options for investing in the Nasdaq with funds, including ways to short the index and even increase the index's total return through a leveraged ETF.

1. A Nasdaq index fund

The easiest way to participate in Nasdaq is to own a simple Nasdaq fund. This fund attempts to mimic the performance of the Nasdaq 100 index, which is a collection of the 100 largest non-financial stocks traded on the Nasdaq exchange.

The main fund here is the Invesco QQQ Trust (ticker: QQQ), which charges an expense ratio of 0.20 percent per year, or $20 for every $10,000 invested. What's striking about this fund is that it has actually significantly outperformed its target index, producing an average annual gain of 18.3 percent over the last decade, compared to an average annual gain of 14.2 percent.

If you're looking for a fund that's even cheaper – and there's no good reason why you wouldn't – then you could go with the Invesco Nasdaq 100 ETF (QQQM). It offers the same features as the first fund, but only charges 0.15 percent per year, or $15 for every $10,000 invested. Although the fund has only been around since 2020, it has performed similarly to its larger cousin.

Investment funds that are based on the Nasdaq are also among the investment funds with the best performance.

2. A leveraged Nasdaq index fund

If the return on a standard Nasdaq fund just isn't high enough for you, you have the option of investing in a leveraged Nasdaq ETF. This type of fund owns some stocks, but also a type of derivative called index swaps, which allows the fund to rise faster than the index itself.

A key name here is the ProShares UltraPro QQQ (TQQQ), which targets three times the daily performance of the Nasdaq 100 index. The fund charges a whopping 0.88 percent of assets per year, but the performance is worth this additional fee. The fund has delivered an average annual return of 36.8 percent over the last decade – but not without a roller coaster ride.

So the total return ends up being about twice as high as the return of the base Nasdaq fund.

3. A short Nasdaq index fund

If you want to profit from the decline in the Nasdaq index – hey, it happens from time to time despite its incredible performance over the last decade – then you can use a short ETF. A short ETF typically performs inversely to the underlying index and rises when the index falls. To achieve such performance, these funds use a type of derivative called index swaps.

One of the most popular names here is the ProShares UltraPro Short QQQ (SQQQ), which targets three times the daily performance of the Nasdaq-100 index. Theoretically, if the Nasdaq fell 1 percent, this fund would rise 3 percent. Given the Nasdaq's strong rise over the last decade, it's no wonder this fund has fallen an average of 52.5 percent annually.

This decline is due not only to the outperformance of the index, but also to the nature of the fund itself, which must constantly hold expensive derivative positions to achieve its goal. The fund charges a fee of 0.95 percent, which is no different than similar short ETFs.

What is the Nasdaq 100 Index?

The Nasdaq 100 index is a collection of the 100 largest non-financial stocks traded on the Nasdaq exchange. The index includes the biggest names in the technology world, including those in the “Magnificent 7” stocks such as Microsoft, Alphabet, Amazon, NVIDIA and Apple.

Because the index includes many of the largest tech stocks, the index is a good measure of the performance of the tech sector as a whole and is often used as an abbreviation for the tech sector.

Tech stocks are consistently among the top performing stocks on the market on a monthly basis.

Risks of ETFs and Leveraged Funds

Although ETFs can be a great way to take advantage of the Nasdaq index, they are not without risks and drawbacks.

• You will only receive the refund if you have: Traders who actively buy and sell are unlikely to enjoy the index's strong long-term return. In fact, active investments tend to perform worse than passive investments. So if you want to benefit from Nasdaq returns, your best bet is to buy and hold a fund.
• Tracking risk: Any fund that tracks an index may not accurately reflect its performance. That's the case with these Nasdaq funds, where the underlying funds have significantly outperformed the Nasdaq by more than 4 percentage points per year. But this also applies to leveraged and short funds, which incur additional costs for derivatives.
• Structure costs: Leveraged and short funds incur additional derivative costs, which have a significant negative impact on the performance of these funds. These derivatives must be introduced regularly to achieve the fund's objective.
• Volatility: The leveraged and short funds can cause serious volatility – and that's part of the problem – but if you invest in them, you'll need an iron stomach to weed that out.

While the Nasdaq is a popular tech fund, investors seeking broader diversification can take a look at the best S&P 500 index funds, which include the top tech stocks and hundreds of others.

Bottom line

Investors who want to benefit from the performance of the technology-heavy Nasdaq index can use different funds, depending on what performance they expect from the index. Investors should also consider working with one of the best brokers for ETF investing to get a wide range of features.

Editorial Disclaimer: All investors are advised to conduct their own independent research on investment strategies before making any investment decision. In addition, investors should note that the past performance of an investment product does not guarantee future price increases.