The PowerShares QQQ (NasdaqGM: QQQ), which tracks the tech heavy Nasdaq-100 Index, is dealing with the recent pullback in the FAANG stocks, but the widely followed exchange traded fund is higher by 18.5% year-to-date and still resides near record highs.
Those points could be signs that QQQ and the Nasdaq Composite can deal with the recent setbacks and continue moving higher as 2017 rolls along.
“However, if we look at the NASDAQ from 60,000 feet, we see a much more encouraging picture. The narrow view says ‘tech stocks’ have gone up for years and may be in a bubble,” according to ETF Daily News. “The longer-term view says, ‘the NASDAQ was able to make it back to the highs made in 2000, and recently broke out of a 20-year period of consolidation.’”
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, 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).
“What about earnings and valuations? Both are reasonable areas of concern. While the conclusions may surprise some, a review of historical facts on January 7, 2017 moved those concerns out of showstopper territory,” according to ETF Daily News.
For more news and strategy on the Technology market, visit our Technology category.
Tom Lydon’s clients own shares of Apple, Facebook and QQQ.