Inside the Out-Performance of the Nasdaq 100 Index and QQQ

The popular Nasdaq-100 Index (NDX) and the largest ETF tracking that index, the Invesco QQQ (QQQ) are outperforming rival broad market benchmarks this year. Large exposure to the steady technology sector is helping QQQ stand firm in a rough market, but there’s more to the story.

QQQ allocates a combined 89% of its weight to the technology, communication services, and consumer discretionary sectors. Obviously, what’s inside QQQ goes a long way toward explaining the fund’s returns, but what’s left out of the fund also helps.

For example, QQQ features no exposure to energy, financial services, and real estate stocks – three of this year’s lagging sectors. In other words, QQQ is more a growth fund than a value fund and that’s a benefit with the value factor lagging.

“If investors are looking to gain access to innovative companies, they could position their portfolio towards technology products and services as that sector continues to grow,” said Ryan McCormack, QQQ strategist at Invesco in remarks sent to ETF Trends. “QQQ delivers exposure to companies that are at the forefront of transformation.”

Going With Growth

The growth style, though, may be gaining momentum as investors turned to upbeat economic and earnings data, causing many to adopt a more risk-on attitude. Since growth stocks show high multiples, investors may expect that the companies will sustain a high growth rate. In contrast, traders may feel that firms with low multiples would continue to experience tepid growth.

“The Nasdaq-100 is heavily allocated towards top-performing industries such as Technology, Consumer Services, and Health Care, which have helped the Nasdaq-100 outperform the S&P 500 by a wide margin between Dec. 31, 2007, and March. 31, 2020,” according to Nasdaq Global Indexes.

QQQ’s healthcare exposure matters, too.

“QQQs healthcare holdings relative to other market tracking indexes are geared towards biotech, and we have a larger weighting to names like Gilead and Regeneron,” said McCormack. “Unlike other indexes that have more exposure to large cap pharma and medical devices, which have not fared nearly as well in this unprecedented market.”

An increasingly digital global economy also bodes well the long-term QQQ thesis.

“People are realizing that the shift to digital and the constituents of the Nasdaq 100 and QQQs are well positioned to not only handle this shift but to capitalize on working and learning remotely,” according to McCormack.

Taking a look QQQs underlying holdings, Alphabet is one of the best contributors to the QQQ and Nasdaq100 today.

On its most recent earnings calls, they discussed the acceleration of moving its business to digital, McCormack said.

“For example, Google’s Meet teleconferencing service is now adding about 3 million users per day, showcasing they are well positioned to take advantage of the longer term trend of shifting to digital,” he said.

For more on disruptive technologies, visit our Disruptive Technology Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.