February 6, 2025 | Partner Content

Where ETFs can fit in an overall investing approach

Invesco QQQ

Invesco QQQ ETF tracks the Nasdaq-100 Index — giving you access to the performance of the 100 largest non-financial companies listed on the Nasdaq. The fund and the index are rebalanced quarterly and reconstituted annually.

Key takeaways

ETFs have continued to grow in popularity, offering investors a flexible, cost-effective way to help diversify and align their portfolios with specific goals.
Recent trends, such as the rise of actively managed and thematic ETFs, are giving investors new tools to adapt to market dynamics.
ETFs remain a valuable option for tax efficiency, model portfolios, and accessing specific sectors or asset classes.

ETFs have become an integral part of modern investing strategies. This success isn’t a surprise because ETFs have a lot going for them: lower costs compared to most mutual funds¹, portfolio transparency², and the ability to buy and sell them during the trading day (daily liquidity).³

These features can make them an attractive option for investors with different goals, portfolio sizes, and profiles. Whether investors are taking a long-term approach or seeking tactical exposure, chances are ETFs can complement an overall approach.

1. Diversification and targeted exposures

ETFs may provide diversification across a broad range of securities, helping to spread risk. They can track entire indices, like the Nasdaq-100® Index, or focus on specific sectors, asset classes, countries, or geographical regions. In today’s market, investors are increasingly using thematic ETFs to access emerging trends such as clean energy, artificial intelligence (AI), and blockchain technologies. These targeted exposures may allow investors to balance broad diversification with opportunities for potential growth.

2. Getting sector exposure

Some investors use sector ETFs to gain exposure to entire industries rather than researching and purchasing individual stocks. One potential drawback of picking an individual stock is that it may underperform its industry.

ETFs can make it simple to invest in entire specific sectors, whether investors are interested in technology, healthcare, or consumer discretionary. By selecting sector ETFs, investors can seek to take advantage of growth opportunities while staying nimble as market trends shift. For example, industry-specific ETFs have helped make it easier to implement so-called sector rotation strategies that favor specific sector ETFs that may perform better due to the current phase of the economic cycle.

3. Implementing core-satellite approaches

The core-satellite approach remains a popular strategy for helping balance stability and growth. A core investment in broad market ETFs can provide potential stability, while satellite positions in sector- or thematic ETFs may offer growth potential. Incorporating actively managed ETFs into a satellite strategy has become increasingly popular, as these funds offer the potential for outperformance while still retaining the transparency and liquidity of ETFs.

4. Potentially limiting taxes

ETFs are known for their tax efficiency, a benefit of their unique “in-kind” creation and redemption process. This structure helps minimize taxable events, making ETFs a good choice for long-term, tax-conscious investors. In 2023, 60% of U.S. equity mutual funds paid capital gains distributions to their shareholders.⁴ On the other hand, in 2023, only 40, or 2%, of Invesco’s ETFs, distributed capital gains for one of the lowest percentages in the industry.⁵ In short, the inner workings of ETFs may help limit the capital gains taxes that investors have to pay every year. ETFs are also a popular instrument in tax-loss harvesting strategies that can potentially lower tax bills by taking advantage of losses in a portfolio and offsetting gains.

5. Building model portfolios

ETFs are popular building blocks in many model portfolios, helping provide a cost-effective and flexible way for financial professionals and investors to implement diversified strategies. Model portfolios are often built around specific goals, like income generation, growth, or risk management. The growth of digital platforms and robo-advisors has made ETF-based model portfolios more accessible, allowing investors to automate and optimize their portfolio allocations.

ETFs remain relevant in a changing market

The role of ETFs in an overall investing approach continues to expand as market conditions evolve. Over the past year, trends such as the rise of actively managed ETFs, thematic investing, and option-based strategies have reshaped the ETF landscape. Investors have been increasingly turning to these tools to help mitigate volatility, capture growth opportunities, and navigate inflationary environments.

From helping to provide instant diversification to offering tax efficiency and sector exposure, ETFs remain an essential building block for many modern portfolios.

ETFs like Invesco QQQ, which tracks the Nasdaq-100 Index, can help investors pursue their goals with precision, cost-effectiveness, and flexibility.

Footnotes

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

Most ETFs disclose their holdings daily.

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.

Morningstar as of 12/31/23. Based on a total universe of 2,594 U.S. equity mutual funds. 10-year period from 1/1/14 to 12/31/23.

Morningstar as of 12/31/23.

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Past performance is not a guarantee of future results.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional/financial consultant before making any investment decisions.

Companies engaged in the development, enablement and acquisition of blockchain technologies are subject to a number of risks. Blockchain technology is new and many of its uses may be untested. There is no assurance that widespread adoption will occur. The extent to which companies held by the Fund utilize blockchain technology may vary.

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

Investors should be aware of the material differences between mutual funds and ETFs. ETFs generally have lower expenses than actively managed mutual funds due to their different management styles. Most ETFs are passively managed and are structured to track an index, whereas many mutual funds are actively managed and thus have higher management fees. Unlike ETFs, actively managed mutual funds have the ability to react to market changes and the potential to outperform a stated benchmark. Since ordinary brokerage commissions apply for each ETF buy and sell transaction, frequent trading activity may increase the cost of ETFs. Investors should talk with their advisers regarding their situation before investing.

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.

The Fund is non-diversified and may experience greater volatility than a more diversified investment.

The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues

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.

The Nasdaq-100® Index is a stock market index made up of equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. Investment cannot be made directly into an index.

Invesco does not offer tax advice. Please consult your tax adviser for information regarding your own personal tax situation. While it is not Invesco’s intention, there is no guarantee that the Funds will not distribute capital gains to its shareholders. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

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

Not a Deposit | Not FDIC Insured | Not Guaranteed by the Bank | May Lose Value | Not Insured by any Federal Government Agency

The sponsor of the Invesco QQQ TrustSM 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.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their financial professional for a prospectus/summary prospectus or visit invesco.com/fundprospectus.

Invesco is not affiliated with SRL Global.

Invesco Distributors, Inc.