If I Were in My 20s, I'd Buy This Spectacular Nasdaq-100 Index Fund and Hold It Forever

The Nasdaq is favored by small tech firms for its lower costs and fewer compliance hurdles compared to exchanges like the New York Stock Exchange. Over the years, many of these nascent companies have grown into trillion-dollar behemoths, now represented in the Nasdaq-100 index. This index comprises the 100 largest Nasdaq-listed companies, excluding financial institutions, with over 65% of its value concentrated in the high-growth technology sector. The index generally outperforms the more diversified S&P 500 index.

The technology sector has dominated the stock market over the past two decades, thanks to explosive growth in areas such as semiconductors, smartphones, cloud computing, enterprise software, and artificial intelligence (AI). The Invesco QQQ ETF (NASDAQ: QQQ), which tracks the Nasdaq-100, offers young investors the chance to benefit from this sector's growth. All of the top 10 holdings in the ETF are currently heavily invested in AI, whether through chip design, model building, or software development.

A global shortage of specialized AI data center chips has driven up demand and benefited key players like Nvidia and Micron. Nvidia's GPUs are currently the industry standard for AI training and inference workloads, while AMD is rapidly closing the gap technologically. High bandwidth memory (HBM) is essential for smooth data flow to GPUs, benefiting Micron's revenue and stock performance.

Major tech companies like Alphabet, Microsoft, and Amazon are heavy users of AI data center chips, renting computing capacity to businesses via their cloud platforms and developing AI models and software to enhance their services.

The AI boom began in earnest in 2023, coinciding with OpenAI's ChatGPT reaching 100 million users. Since then, the top 10 stocks in the Invesco ETF have delivered an average return of over 500%. Over a 27-year period, the Invesco QQQ ETF has generated a compound annual return of 10.6%, compared to the S&P 500's 8.6%. If a 25-year-old invested $20,000 in the Invesco QQQ ETF versus the S&P 500, they could end up with more than double the amount of money at retirement, thanks to the power of compounding returns.

However, this strategy comes with higher volatility, as evidenced by the Invesco QQQ ETF's 35% peak-to-trough decline during the 2022 bear market, compared to the S&P 500's 25% decline. Investors can mitigate this risk by allocating some funds to an S&P 500 index fund. Despite not being on the latest 10 best stocks list, the Invesco QQQ Trust could still provide strong returns and serve as a valuable income source in retirement.