For investors looking for added technology exposure in their broader market exchange traded funds, the PowerShares QQQ (NasdaqGM: QQQ), the Nasdaq-100 tracking ETF, is a popular alternative. And technology has been a great place to be in recent months. Since the November U.S. presidential election, technology is the best-performing sector.
However, with technology’s ascent and that of QQQ, come concerns that the Nasdaq-100 is too heavily exposed to a small number of stocks. Additionally, some analysts opine that the benchmark’s significant technology overweight leaves it vulnerable should tech stocks fall out of favor.
“The index has lopsided sector weightings, including a heavy stake in technology stocks, that it doesn’t explicitly target. These unintentional tilts are a source of risk,” said Morningstar in a recent note. “In addition, the index’s focus on a single exchange (the Nasdaq) unnecessarily limits the stocks available to it. So, despite its strong record, modified market-cap-weighting approach, which promotes low turnover, and cost advantage against its actively managed peers, the fund earns a Morningstar Analyst Rating of Neutral.”
QQQ currently allocates 56.4% of its weight to the technology sector, nearly two and a half times the S&P 500’s weight to that sector. QQQ’s 21.3% weight to the consumer discretionary sector is also well above the S&P 500’s exposure to that group.