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Motley Fool: Faster-growing Nasdaq stocks

An employee monitors prices at the tech-driven Nasdaq MarketSite in New York in April 2015.  (Associated Press)
An employee monitors prices at the tech-driven Nasdaq MarketSite in New York in April 2015. (Associated Press)

Many people eager to benefit from the big stocks listed on the Nasdaq stock market invest in an exchange-traded fund, or ETF, called Invesco QQQ Trust (QQQ), which owns shares of the 100 biggest companies there. But one-third of that fund’s assets was recently in just three stocks – Apple, Amazon.com and Microsoft – and its top eight stocks made up just over half. That kind of concentration isn’t ideal for investors who hope to profit from smaller and potentially faster-growing companies in the Nasdaq.

For those folks, there’s a relatively new ETF: the Nasdaq Next Gen 100 (QQQJ). It focuses on the 100 next-biggest Nasdaq companies, including many popular stocks without trillion-dollar market values.

The fund’s top holdings include Atlassian, Marvell Technology Group, Okta, The Trade Desk, Roku, Old Dominion Freight Line, Liberty Broadband, Fortinet, Zscaler, Coupa Software and Garmin. As of this writing, none made up as much as 3% of the ETF’s overall value. Almost half of the fund is invested in technology, with health care, communication services and consumer stocks getting most of the remainder.

Take a closer look at this fund to see if its holdings are companies you’d like to own, and if you expect them to grow in value over time.

Ask the Fool

Q. Can you explain portfolio rebalancing? – R.W., Laramie, Wyoming

A. It’s when you adjust the percentage of your portfolio invested in asset classes such as stocks, bonds and cash. Imagine that you start with a desired portfolio mix of 80% stocks and 20% bonds. Over a year or two, if some stocks grow briskly, you might end up 90% in stocks and 10% in bonds. If so, you might sell some stocks and buy some bonds.

You can also rebalance within an asset class. If one of a dozen stocks you own shoots up tenfold over a year or two, it will represent a big chunk of your portfolio. To rebalance, you might sell some of its shares and buy other shares in order to have fewer eggs in that one basket.

Q. What does REIT mean? – D.L., Washington, Pennsylvania

A. It stands for “real estate investment trust.” REITs are companies that let you invest in real estate without buying any actual properties. Instead, you just invest in one or more REITs, which own (or finance) properties that produce income, often in categories such as offices, apartments, shopping centers, data centers, warehouses, medical facilities – even cellphone towers or timberlands. (Most REITs own real estate, but there are also mortgage REITs, which are different: They finance real estate and collect income from interest instead of rent.)

REIT shareholders enjoy diversification across many properties – and also often receive significant dividend income, because REITs must pay out at least 90% of their taxable income to shareholders. REITs generally trade like regular stocks on stock exchanges; those listed that way own more than $2 trillion worth of U.S. assets. Learn more at REIT.com.

My dumbest investment

My dumbest investment was buying into Luckin Coffee. I will never buy another Chinese stock. – H.T., online

The Fool responds: Luckin Coffee, a Chinese startup, took its stock public in May 2019 at $17 per share; in January 2020, those shares topped $50 apiece. The company, started in 2017, had quickly established more than 2,000 locations and become the No. 2 coffee chain in China, behind Starbucks. That got the interest of many investors, who grabbed shares in expectation of further growth, sending the price up. What happened?

Well, the company was rocked by scandal and its shares were delisted, recently trading over the counter for less than $5 apiece. In April 2020, the company announced an internal audit, indicating that some of its management may have engaged in fraud, inflating the company’s revenue. That news initially sent shares plunging by 80%.

You needn’t avoid all Chinese stocks, but take some lessons from this experience. For one thing, if a company’s growth seems too good to be true, don’t trust it blindly. And do be careful with foreign stocks, because some countries require much less disclosure from publicly traded companies than the U.S. does, and their audits are often not as thorough.

Some countries’ accounting standards are not as reliable, either. Foreign stocks offer diversification, which is good, but tread carefully.

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