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A high deductible health plan, or HDHP, has a higher deductible than other types of insurance plans, as the name implies.

In return for higher deductibles, these plans usually charge lower premiums than other types of health plans.
You can combine a HDHP with a tax-advantaged health savings account (HSA). Money saved in an HSA can be used to pay for out-of-pocket, qualified medical expenses before the deductible kicks in.

An HDHP can be a good, affordable health insurance option for people who are relatively healthy and don’t see doctors or receive medical services frequently.

But these plans may not be the best choice for everyone. Read on for important things to know about HDHPs.

How Does a High Deductible Health Plan Work?

When you sign up for an HDHP, you will pay most of your medical bills out of pocket until you reach the deductible (with some exceptions, explained below).

Your deductible is the amount you’ll pay out of pocket for medical expenses before your insurance pays anything.

Under current law, in order to be considered an HDHP, the deductible must be at least $1,400 for an individual, and at least $7,000 for a family.

But deductibles can be significantly higher than these minimums, and are allowed to be as high as $2,800 for an individual and $14,000 for a family.

As with other insurance plans, HDHPs come with out-of-pocket maximums. This is the most you would ever have to pay out of pocket–that includes your deductible, copayments, and coinsurance (but exclude premiums and medical costs not covered by your plan).

Out-of-pocket maximums for HDHP plans can’t exceed $2,800 for an individual and $14,000 for a family.
Despite the high deductible with HDHPs, some health care costs may be covered 100 percent even before you meet your deductible.

The government requires all HDHPs sold on the federal insurance marketplace and many other HDHP plans to cover a fair number of preventive services without charging you a copayment or coinsurance, even if you haven’t met your deductible.

You can find a list of those covered services for adults , specifically for women , and for children at HealthCare.gov.

How Does an HDHP Work With a Health Savings Account?

When you purchase a high deductible health plan, whether it’s through the federal marketplace, an employer, or directly through an insurance company, you may also open a health savings account (HSA).

You can put aside pre-tax income in the HSA to help pay your deductible or other qualified health care expenses. However, HSA funds typically can not be used to pay for health insurance premiums.

Earnings also grow tax-free in an HSA account, and withdrawals used to pay for qualified healthcare expenses are not subject to federal taxes. As a result, HSAs can result in significant tax savings.

Currently the maximum you can save in an HSA each year and receive the tax benefits is $3,600 for an individual and $7,200 for a family. Some employers make contributions to employee HSA accounts as part of their benefits package.

HSAs are also portable, meaning you take your HSA with you when you change jobs or leave your employer for any reason. Your HSA balance rolls over year to year, so you can build up reserves to pay for health care items and services you need later.

You may contribute to an HSA only if you have an HDHP.

What are the Pros and Cons of HDHPs?

As with any health insurance plan, there are both advantages and disadvantages of HDHPs. Here are some to consider.

Advantages of HDHPs

•  Lower premiums. In exchange for the high deductible, HDHPs typically charge lower premiums than traditional healthcare plans like PPOs.
•  You can combine an HDHP with an HSA. This can help you cover out-of-pocket medical expenses with pre-tax dollars, which make these costs more affordable. And, these accounts never expire.
•  You get the same essential benefits and no-cost preventive care as other plans. HDHPs are required to cover the same types of healthcare expenses as other plans (after you meet the deductible). And, they offer the same no-cost preventive services as their more expensive counterparts.

Disadvantages of HDHPs

•  High out-of-pocket costs due to high deductibles. You will need to pay for medical expenses out of pocket (because of the high deductible), while also paying your monthly premiums.
•  A disincentive to receive care. You might be inclined to skip doctor visits because you’re not used to having such high out-of-pocket costs. Forgoing treatment, however, could cause more serious health problems down the line.
•  Emergencies can be expensive. If you need unexpected care or go to the hospital, an HDHP will not pay anything until you have met your high deductible. This can mean having to come with a significant amount of cash to cover your medical bills.

HDHPs vs. PPOs

A preferred provider organization, or PPO, is a traditional type of health plan that usually has a lower deductible than an HDHP, but charges higher premiums.

With a PPO, you will typically only have to pay a copayment, or “copay,” when you see a doctor or fill a prescription.

For other medical services and treatments, you will likely have to pay out of pocket until you reach the deductible, but that will happen sooner than it would with a HDHP.

Both PPOs and HDHPs typically have a network of providers you can work with to get the best rates.

In a PPO, however, the provider list may be smaller than it is with an HDHP. To get the best rate on your care, members of either type of plan will want to be sure they are sticking to that list.

A PPO may be advantageous if you go to the doctor a lot and/or run into unexpected medical expenses, since you start to get help from the health plan much earlier in the year than you might with an HDHP.

A PPO could end up costing you more, however, if you end up having a year with low medical expenses.

The Takeaway

So are HDHPs worth it? With an HDHP, you will likely pay a lower monthly premium than you would with a traditional health plan, such as a PPO, but you will have a higher deductible. If you combine your HDHP with an HSA, you can pay that deductible, plus other qualified medical expenses, using money you set aside in your tax-free HSA. If you are young and/or generally healthy with no chronic or long-term conditions, an HDHP may be the most affordable option for you.

On the other hand, if you have a medical condition and you make frequent doctor visits, you may find you need coverage that kicks in sooner than it would with an HDHP plan. It can be a good idea to estimate your health expenses for the upcoming year and get a rough idea of how much you will be responsible for out of pocket with an HDHP before you sign up. You might want to use a budgeting app, such as SoFi Relay, which makes it easy to categorize and track all of your expenses in one mobile dashboard.

Health insurance is just one way to protect your budget, but making sure you have insurance on your home can also help you avoid expenses in the future. SoFi Protect and Gabi offer insurance for both renters and homeowners, so you can be sure that your home, and the things inside you care about, are protected.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Insurance not available in all states.
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SoFi is compensated by Gabi for each customer who completes an application through the SoFi-Gabi partnership.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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SOCO21017

The Invesco QQQ ETF, formerly known as the PowerShares ETF, is an exchange-traded fund that tracks the Nasdaq 100 index.

The QQQ is widely considered to be one of the safer ETFs on the market and has received positive performance rankings from analysts. The fund enjoys high liquidity, being the second-most-traded ETF in the United States as of mid-2020.

The QQQ only holds companies that are included in the Nasdaq 100 and have been listed on the Nasdaq exchange for a minimum of two years. As of August 2020, the ETF contained 104 holdings.

The QQQ exists as a unit investment trust. A UIT is an investment company offering a fixed portfolio through a single security that can be bought and sold by investors as individual shares.

An investment company of this type doesn’t actively trade stocks, meaning shares of its investments aren’t bought or sold unless there’s an extraordinary event like a bankruptcy or corporate merger.

So investors can know that when they own shares in a holding offered by this type of investment company, the underlying assets will mostly stay the same. Not all funds are like this; in fact, some ETFs are actively traded and sometimes have portfolio managers altering the underlying assets daily.

In many ways, the QQQ might be an attractive option for inclusion in a long-term investment portfolio for some investors. The ETF provides cost-efficient exposure to many large companies with high levels of innovation. Investors don’t have to be burdened with picking specific stocks or being limited to a technology-only fund (although the QQQ is heavily weighted toward tech, but it also invests in other sectors).

What is the QQQ? To answer that question, first we must look at the Nasdaq 100.

What Is the Nasdaq 100?

The Nasdaq exchange is the second-largest stock exchange in the world, based on market cap.

In addition to hosting the stocks of some of the world’s largest companies, the exchange has had several notable accomplishments over the years. It was the first to offer electronic trading, the first to keep records in cloud storage, and the first to launch a website.

The Nasdaq 100 consists of the 100 largest companies (by market capitalization) listed on the Nasdaq exchange, except for financial companies.

Part of what makes the Nasdaq 100 index unique is that it uses something called a modified capitalization methodology. The goal of this method is to stop the index from becoming too heavily influenced by any of its super large companies.

That way, if a tech giant like Apple, for example, were to see a big selloff one day, the Nasdaq 100 shouldn’t see as steep a decline, assuming the other 99 companies aren’t also going down.

Stocks in the Nasdaq can be more volatile and riskier than average. But the returns can also be above average.

As of July 2020, the Nasdaq 100 index had achieved a 426% return on investment over a 10-year period. (Note: This refers to the cumulative return of all 100 companies in the index over that amount of time. The index itself has no single way for investors to purchase it, which is why things like the QQQ exist.)

Each quarter, Nasdaq looks at the composition of the index and adjusts weightings as needed to try to achieve this goal of a more equitable performance.

According to the Nasdaq website, there are over 490 investment products tied to the Nasdaq 100. The Invesco QQQ ETF is included.

What Is in the QQQ ETF?

The Invesco QQQ ETF is one of the many ways for investors to gain exposure to the Nasdaq 100.

Most of the QQQ involves large international and United States-based companies in sectors like telecommunications, health care, industrial matters, and technology.

Tech giants like Tesla, Intel, Apple, and Google make up a large portion of the ETF, as the Nasdaq tends to include many tech and growth-oriented stocks.

In fact, as of October 2020, stocks in the technology sector made up almost half of the QQQ ETF, at 48.2%. Other notable sectors included communications services at 19.1%, consumer discretionary at 18.9%, health care at 6.7%, and consumer staples at 4.7%.

The QQQ is rebalanced each quarter (every three months), meaning its managers try to balance the investments in a way that will not give too much influence to any one stock. The ETF is also reconstituted annually, meaning its managers consider which securities to buy, sell, or hold throughout the coming year.

Now that we’ve looked at what is in the QQQ ETF, let’s look at some pros and cons of investing in it.

Pros and Cons of the QQQ ETF

The QQQ has its benefits and drawbacks like any other investment choice.

ETFs come with something called an expense ratio, which represents the amount of fees paid to the company that manages the fund. The fees cover the expenses of operating and maintaining the fund.

Expense ratios are expressed as percentages that will be taken from the fund’s assets before paying investors. If a fund has an expense ratio of 0.5% and the fund sees a return of 4.5% on the year, investors will see a return of 4% after expenses.

Expense ratios are important to consider for any ETF because they can have a big influence on returns, especially for long-term investors.

Pros

One of the pros of the QQQ is that it comes with a very low expense ratio, coming in at just 0.2%, or 20 cents for every $100 invested. This low cost of holding the fund only amplifies its returns over time.

Outsized returns are another pro for this ETF. Though past performance doesn’t always indicate future results, the QQQ has provided higher returns than the S&P 500 for much of recent history. Ten of the last 12 years have seen the QQQ outperform the S&P 500.

Cons

One of the negatives of the QQQ is a relative lack of diversification. While the fund may be more diversified than an ETF that invests exclusively in technology, it’s still less diversified than many similar securities.

The Nasdaq 100 has stocks from eight sectors, but as we saw earlier, the tech sector alone makes up more than 60% of the entire index.

Due in part to this lack of diversification and focus on tech and communications, the QQQ can see above-average volatility. This can make it riskier in the short term, although the fund is still seen as a relatively safe investment.

While the QQQ could see wild swings from time to time, those swings will likely be much less severe than holding the individual stocks in the fund.

How to Invest in the QQQ ETF

Let’s review all this briefly.

The Nasdaq is one of the largest stock exchanges in the world.

The Nasdaq 100 is an index that tracks the top 100 largest stocks in the Nasdaq.

The QQQ ETF is a popular fund that tracks the Nasdaq 100.

After understanding some of the basics about what is in the QQQ ETF, let’s assume an investor wants to gain exposure.

What’s the best way to invest in the QQQ?

Investors will have to answer this question for themselves, but here are a few potential ways to go about it.

•  Search for the ticker “QQQ” and buy shares of the ETF directly in a brokerage account. When wanting to invest large sums, consider dollar-cost averaging.
•  Look into leveraged ETFs that track indexes on a 2:1 or 3:1 basis. These are riskier. Leveraged funds might be more for short-term traders. Examples are QLD or TQQQ.

The Takeaway

The Invesco QQQ ETF is a popular exchange-traded fund that tracks the Nasdaq 100 index. Like any investment choice, the QQQ has pros and cons. One of the easiest ways to invest in an ETF like the QQQ might be to buy shares on an exchange like SoFi’s.

SoFi offers all the tools that both beginning and experienced investors need to accomplish their monetary goals. SoFi Invest® offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

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