The Nasdaq Composite and the PowerShares QQQ (NasdaqGS: QQQ), the Nasdaq 100 tracking ETF, look a lot different today than when the technology bubble burst over a decade ago.
For QQQ, home to $43.4 billion in assets under management, and related ETFs, evolving gracefully may not be such a bad thing. That could prove to be the case even as the Nasdaq is nowhere close to its 2000 peak in a year in which the Dow Jones Industrial Average and S&P 500 have made scores of record highs.
The Nasdaq, often viewed as “tech heavy” is still that, but no to the degree it was in 1999 or 2000. “Technology companies make up a smaller percentage of the index, roughly 42 percent, compared with 56 percent 13 years ago. The telecom industry is a little less than 2 percent, compared with 18 percent back then,” according to the Associated Press.
QQQ is heavier on tech with a 57.2% weight to that sector, but that sector’s evolution, particularly at the large-cap level, has proven favorable for the ETF. Nearly half of QQQ’s tech weight goes to Apple (NasdaqGM: AAPL), Microsoft (NasdaqGM: MSFT) and Google (NasdaqGM: GOOG).
All three sit on cash hoards that are bigger than the market values of many U.S. companies. Apple is now a dividend payer and one of this year’s biggest repurchasers of its own shares. Microsoft is not just a dividend payer, but a dividend grower, having more than doubled its payout in just the past three years. [A Technology ETF With a Dividend Twist]
Today, QQQ also sports a 22% weight to consumer discretionary names, compared almost zilch in 2000. That does include pricey high-fliers like Amazon (NasdaqGM: AMZN) and Priceline (NasdaqGM: PCLN), but more prosaic businesses such as Starbucks (NasdaqGM: SBUX) and DirecTV (NasdaqGM: DTV) are also found among QQQ’s discretionary names. [The Changing Face of QQQ]
Even with the run-up in those stocks this year, the Nasdaq is far cheaper today than it was in the late 1990s or earlier this century. When the bubble was at its biggest, the index had a price-to-earnings ratio of 194:1, which means investors were paying $194 for every $1 of earnings the companies in the index brought in, according to the AP. That compares with today’s P/E of less than 24.
QQQ had a P/E of 18.6 at the end of third quarter, according to PowerShares data.
These days, the talk centers around the Nasdaq returning to 5,000 (its all-time high is just under 5,050), but its inflation adjusted peak is 6,845.83, a long way from Tuesday’s close at 4,060.
Apple, Amazon, Google and friends will certainly play a role in future upside for QQQ and the Nasdaq, but, as the AP notes, the health care sector’s impact on the Nasdaq should not be discounted. Health care and the Nasdaq means biotech and medical devices.
Biotech has already been driving the Nasdaq as several biotech funds, including the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), have been among the best-performing sector ETFs for several years now. [2012’s Best Sector ETFs Kept Soaring This Year]
PowerShares QQQ
Tom Lydon’s clients own shares of Apple, Amazon, Microsoft, Google and QQQ.