The PowerShares QQQ (NasdaqGM: QQQ), which tracks the tech heavy Nasdaq-100 Index, is a popular avenue for investors looking for exposure to the technology sector, the best-performing sector in the S&P 500 in 2017.
Though QQQ is not a dedicated technology ETF, the fund is heavy on technology darlings, such as Apple Inc. (NASDAQ: AAPL) and Facebook Inc. (NASDAQ: FB) and investors have recently been flocking to the fund. However, there is a way for investors to isolate the Nasdaq-100’s technology holdings with an exchange traded fund.
Enter the First Trust Nasdaq-100 Tech Index (NasdaqGM: QTEC). The $2 billion QTEC, which turned 11 years old earlier this year, tracks the NASDAQ-100 Technology Sector Index. That index is equally weighted.
“The index consists of companies in the NASDAQ-100 Index classified as Technology according to Industry Classification Benchmark (ICB),” according to First Trust. “The index is reconstituted once a year based on the NASDAQ-100 reconstitution in December, but replacements may be made during the year if there is a replacement in the NASDAQ-100 Index.”
“This is an equal-weighted, not a cap-weighted, fund. The idea of rebalancing every 90 days to keep it balanced means if a particular company shoots way up and another plunges after missing 12-week earnings by a penny a share, the fund is forced to buy more shares of the one that is down and sell some shares of the one that has taken off,” according to a Seeking Alpha analysis of QTEC.
Related: Investors Return to Tech ETFs With Renewed Enthusiasm
QTEC is up 23.6% year-to-date, slightly ahead of QQQ, but QTEC has also been more volatile than its cap-weighted counterpart. QTEC allocates nearly 70% of its combined weight to semiconductor and software stocks. Internet and computer names combine for another 24%. Investors should note that since QTEC excludes consumer discretionary and healthcare names, among others, it does not hold 100 stocks. Rather, this ETF is home to just 34 components.
“So QTEC deals with big firms but rebalances the total amount held in each one by regressing each to the mean of just under 3% every quarter. Regression to the mean could hurt performance relative to an individual stock like Apple but it also means it is regularly buying low and selling high, albeit in small bites of the elephant each time,” notes Seeking Alpha.
For more news and strategy on the Technology market, visit our Technology category.
Tom Lydon’s clients own shares of Apple, Facebook and QQQ.