Buy Apple — or Try Buying the Bushel

Apple (NASDAQ:AAPL) reported record earnings Jan. 24, and the next day its stock jumped more than 6%. The tech darling sold more iPhones, iPads and Mac computers in the first quarter ended Dec. 31, 2011, than ever before.

And just as consumers can’t get enough of its products, it seems investors can’t get enough of its stock.

For those of you who want to ride the Apple Express but aren’t sure where this party ends, you should consider buying into an ETF or mutual fund that owns AAPL stock. Apple is the largest holding in the Nasdaq Composite Index, so one possibility is to consider a fund that tracks the index — or for a bundle of bigger companies, you could go with the Nasdaq’s top 100, which also has Apple in the top spot.

Entire Nasdaq

By eliminating funds with leverage, the list of ETF and mutual fund candidates owning the entire index is reduced to just one option for each, both offered by Fidelity. The mutual fund is the Fidelity Nasdaq Composite Index Fund (MUTF:FNCMX), which owns all 2,711 stocks listed on the Nasdaq. The ETF version is the Fidelity Nasdaq Composite Index Tracking Stock (NASDAQ:ONEQ), and it too owns the entire index.

Over the past five years, both funds achieved annual returns of 3.65%, 14 basis points less than the index itself. Before you bemoan the tracking error, keep in mind that they still managed to beat the S&P 500 by 301 basis points.

Of course, everything is relative. Apple beat both funds by more than 35 percentage points annually over this period. It’s this kind of superior performance that makes it awfully tempting to take your chances with Apple stock. However, reversion to the mean and a lack of diversification should at least make you think twice.

The expense ratio of the ONEQ ETF is 0.30%, 0.05% cheaper than FNCMX, which also has a $10,000 initial purchase — something the ETF bypasses. If you don’t require a monthly investment plan, ONEQ appears to be the better of the two options.

Nasdaq-100

This index includes the top 100 non-financial stocks listed on the Nasdaq. Once again, Apple is the top holding, but your choices in this instance are a little broader.

With respect to mutual funds, four fund companies offer a Nasdaq-100 product: Rydex SGI (MUTF:RYOCX), ProFunds (MUTF:OTPIX), MassMutual (MUTF:MOTAX) and Shelton Capital (MUTF:NASDX). Unless I’m missing a major piece of the puzzle, the best choice in this situation is to purchase Shelton Capital’s fund directly. Shelton has no sales charge, a low $1,000 minimum buy-in and an annual expense ratio of 0.4%. The other three all have expense ratios above 1%. More importantly, NASDX has a five-year annual return of 7.24%, 22 basis points less than the Nasdaq-100, but well ahead of the three others.

On the ETF front, there are three possible choices and two wild cards.

The PowerShares QQQ Trust (NASDAQ:QQQ) is your best choice for several reasons. It tracks the index and is market-weighted, making Apple the largest holding by a wide margin. Its expense ratio is very reasonable at 0.2%, it is the sixth-largest ETF in the U.S. with $30.5 billion in total net assets, and its long-term performance — like the index itself — is substantially higher than the NASDAQ Composite Index.

First Trust offers an equal-weighted index, the NASDAQ-100 EqualWeighted ETF (NASDAQ:QQEW), but its expense ratio is three times the QQQ and its performance hasn’t been nearly as good. The newest option is the RBS NASDAQ-100 Trendpilot ETN (NYSE:TNDQ), a fund that only got its start this past December. Its fees are higher than either the QQQ or the QQEW, and it blatantly ignores the KISS rule of keeping it simple.

The “wild cards” I referred to are the iShares NASDAQ-100 Index Fund (TSX:XQQ) and BMO NASDAQ-100 Equity Fund (TSE:ZQQ), both of which are traded on the Toronto Stock Exchange and hedged to the Canadian dollar. If you want to play up north, the ZQQ is a bigger fund with $83 million in net assets compared to $6 million for the XQQ. In addition, the ZQQ’s average daily volume is four times higher. If liquidity, is an issue, the BMO fund is more appropriate.