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The COVID-19 pandemic and social-distancing strategies used to curb the virus’ spread plunged the US economy into recession in February 2020, marking the end of the longest bull market in American history. The stock market took a tumble, hitting a low in late March. But since then, amid government stimulus designed to minimize the economic impact of the pandemic, stocks have taken back much of the ground they lost.

Will rising stocks, the easing of social distancing restrictions, and the return of millions of people to work spell a quick end to the recession? Possibly. But it’s also possible that we could be in for a double-dip recession. A double-dip recession is one in which the economy enters recession, with a brief recovery before the economy enters recession for a second time. Here’s a look at what that could mean.

Economic Recessions 101

Generally speaking, a recession is a period of economic decline. It can be accompanied by a rise in unemployment, a loss of consumer confidence, drops in income and spending, increased business failures, and, of course, falling stock markets.

There have been 13 recessions since the end of World War II, including the current recession, which began at the end of February and early March as COVID-19 spread across the United States. The economy began to contract as states issued stay-at-home orders, stores and restaurants closed, and travel nearly ceased.

Recession is a natural part of the economic cycle and, historically speaking, the economy has always recovered.

What Shapes Can Recovery Take?

Recovery from recession can take a few different forms, including V-shaped, U-shaped or the double-dip (W-shaped) recovery.

A V-shaped recovery is the best case scenario in which there is a sharp downturn and then the economy rebounds quickly. If you were to graph this type of downturn and recovery it would look like the letter V.

A U-shaped decline and recovery represents a slow economic growth, in which the economy takes months, if not years to return to pre-recession heights. Imagine taking the graph of a V-shaped recession and spreading the bottom out. The Great Recession of 2007–2009, which lasted for 19 months, is a good example of a U-shaped recession.

A double-dip, or W-shaped recession and recovery occurs when the economy enters recession twice in quick succession. An initial recovery occurs relatively quickly, spurred on by government stimulus. However, a second dip occurs that disrupts the recovery process. This second dip could be spurred on by a number of factors, including the end of monetary and fiscal stimulus, ongoing unemployment, a drop in industrial output, falling GDP, or other economic shocks.

When Was the Last Double-Dip Recession?

The last time a double-dip recession occurred in the US was between 1980 and 1982. The scene was set for the first recession of 1980 by monetary policy of the 1970s. Policymakers believed that they could lower unemployment by controlling inflation. This belief led to what was known as “stop-go” monetary policy, which alternated between fighting high unemployment and high inflation.

When the Fed was in “go” time, it would lower interest rates to free up cash for businesses, which could theoretically start to employ more people. When it was in “stop” mode, the Fed would raise interest rates to try and fight inflation. Unfortunately, this strategy didn’t work, and unemployment and inflation rose together during the period.

In 1979, Paul Volcker became the chairman of the Fed and helped squash the cycle of inflation and unemployment by raising the interest rate to 20%. Though this move had some benefits, it also aided in the recession of 1980.

The economy recovered relatively quickly heading into 1981. Though GDP rose, unemployment and inflation remained hig. In response, the Fed tightened the monetary supply and the country plunged back into recession in late 1981. Volcker was determined not to back down from his monetary policy despite increasing criticism from Congress and the Treasury Department, saying “We have set our course to restrain growth in money and credit. We mean to stick with it.”

Eventually, the economy recovered after inflation was brought under control and unemployment fell, ushering in a new era of relative economic stability.

Are We Headed for Another Double Dip?

The movements of the market and the economy can be difficult to predict. No one knows for certain how the recovery will shape up. But some experts say that a double-dip recession is possible again. For example, if states reopen too quickly, relaxing social distancing rules, there could be a resurgence of COVID-19 that leads to another government shutdown.

Congress provided trillions of dollars in aid to help prop up the economy through the CARES Act, which offered direct payments to citizens and loans to small businesses to help keep them afloat.

Yet, experts worry that the government could withdraw its economic aid programs too soon, which would leave the recovery too weak to stand on its own.

Other experts believe that while monetary and fiscal stimulus from the federal government may encourage a short-term, V-shaped recovery, such a recovery would not factor in damage to business balance sheets, sales and profitability, which may take longer to show up and for investors to notice the damage.

It’s unclear what would happen should another dip occur. Would Congress be prepared for a second round of bailouts, for example? Do businesses have enough cash to support them through a second dip, or would more businesses fail? Will consumer confidence fall, making it even more difficult for the economy to bounce back?

Preparing for a Double-Dip Recession

While a double-dip recession can be hard to predict, there are things investors can do to make sure they are prepared.

First, it may be prudent that investors have enough saved in an emergency fund. It is recommended to put away at least three to six months worth of expense. This may help ride out difficult financial periods and make it less likely they’ll need to withdraw money from the market while stocks are down.

Second, investors may want to evaluate how diversified their investment portfolios are. Not all investments will perform the same way during a recession. Some may be up, even as others are down. A diversification strategy allows individuals to spread their money out across asset classes—such as stocks and bonds—and sectors to help reduce the risk that poor performance from any given stock will drag their portfolio down.

Finally, talking to a financial advisor can go a long way in helping create a financial plan to help weather the current and future big recessions. SoFi financial planners are available to members—at no additional cost—to advise them according to their individual financial needs.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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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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