Avoid Scottish Mortgage Trust (SMT) shares and buy this instead

Scottish Mortgage Investment Trust (LON: SMT) share price has severely lagged the FTSE 100 index in the past few months. Shares of the biggest investment trust in the UK were trading at 654p, the lowest level since March 2020. It has plunged by more than 58% from the highest point in 2022.

Scottish Mortgage Investment Trust is cheap for a reason

Baillie Gifford’s Scottish Mortgage is a leading fund that invests in both private and public companies mostly in the technology industry. As a result, the crash in tech stocks has had a major impact on its overall performance. 

Scottish Mortgage has even underperformed other popular technology funds, including Cathie Wood’s Ark Innovation Fund, which is up by more than 20% this year. 

There are two main reasons for this. First, Scottish Mortgage has a big exposure in highly illiquid private companies. As interest rates rise, these companies are more vulnerable because of how difficult it is to find capital. 

The situation was worsened by the collapse of Silicon Valley Bank, which focused on finding technology companies. Some of the top bursts in the private market are Northvolt, Uptake Technologies, and Blockchain.com. It also invested in the now-bankrupt Intarcia Therapeutics. 

Second, Scottish Mortgage is a highly leveraged fund. In the past few years, leverage has jumped to 17%, the highest level in more than a decade. It was about 6% in December 2021. High leverage worked well during the last decade as interest rates remained at a record low. Now, with the Federal Reserve set to keep hiking, the new normal will be relatively difficult. 

Invest in Invesco QQQ instead

Scottish Mortgage Investment Trust is without a doubt cheap. For one, its discount to Net Asset Value (NAV) is about 20%. However, this cheap valuation comes at a steep cost. 

Therefore, since many people invest in SMT for its growth companies, I recommend investing in Invesco QQQ instead. For starters, QQQ is an ETF that tracks the Nasdaq 100 index. It has over $167 billion in assets and a low expense ratio of 0.20%. Scottish Mortgage has seen its assets drop from. £350 billion in 2022 to £230 billion. 

QQQ is a better fund to invest in than both Scottish Mortgage and Ark Innovation Fund because it tracks the biggest American technology companies like Apple, Microsoft, Nvidia, and Google. All its holdings are highly liquid companies that are publicly traded in the US. 

Most importantly, QQQ is a cheaper fund to invest in. While Scottish Mortgage has historically outperformed the QQQ, it seems like the situation is changing as shown in the chart below.