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.
QQQ, one of the largest U.S. ETFs, has equal-weight equivalents equal-weight equivalents such as the Direxion NASDAQ-100 Equal Weighted Index Shares (NYSEArca: QQQE) and the First Trust NASDAQ-100 Equal Weighted Index Fund (NasdaqGS: QQEW).
The tech sector could even see more free cash on hand if Congress proceeds with plans to cut down capital gains on repatriated earnings or follow in President-elect Donald Trump’s proposed repatriation tax holiday policy that would encourage large multi-national companies to bring back hundreds of billions of dollars in cash to the U.S. for possible use in dividends, deals or other projects. Trump plans to levy a 10% repatriation tax on U.S. companies’ overseas profits from foreign subsidiaries, compared to the current 35% tax rate.
Should those plans come to fruition, it would benefit QQQ, an ETF that allocates about 20% of its weight to Apple Inc. (NASDAQ: AAPL) and Microsoft Corp. (NASDAQ: MSFT).
“While the fund’s technology orientation won’t always pay off, it has worked out well over the past decade, owing to its overweighting in the technology sector and more favorable stock exposure in that sector. However, its sector concentrations tend to make it more volatile than most of its large growth peers,” said Morningstar regarding QQQ.
Tom Lydon’s clients own shares of QQQ and AAPL.