International Growth Outlook Could Support These ETFs

There’s been ample talk regarding the Federal Reserve’s ability to engineer a soft economic landing and how failure to do so would likely punish stocks, particularly cyclical and economically sensitive sectors.

Indeed, a hard landing — or, worse, a recession — would likely hinder exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). However, banks and economists are dialing back recession expectations.

That’s one point in favor of these growth-heavy ETFs. Another is the notion that some other major global economies are experiencing steady economic growth — a point that’s highly relevant when evaluating QQQ and QQQM because many of the companies residing in these ETFs generate significant portions, if not majorities, of their revenue outside the U.S.

For example, the technology sector, which accounts for 48.31% of the QQQ and QQQM portfolios, is the most export-dependent in terms of revenue among the 11 GICS sectors. That’s not a guarantee of full protection in the event the U.S. economy materially contracts, but it can act as a modest buffer.

For International ETFs, It’s a Big World

Essentially all of the companies of note in terms of weight in QQQ and QQQM are U.S.-based corporations, but the ETFs have potentially attractive international allocations — which is meaningful, as some ex-U.S. economies are proving steadier than expected.

“As investors feel better about the outlook, we have seen many developed market indexes challenge new multi-year or even all-time highs. Germany, France and Japan are examples of this, as rates have been normalizing higher,” noted Todd Asset Management. “Although China has been making halting steps toward stimulus, it appears that the process is going to take longer than many investors expected.”

There are other clear international benefits for QQQ and QQQM, including major developed market governments unveiling massive green energy spending plans, which will boost demand for semiconductors. The Invesco ETFs are homes to more than a dozen chip stocks. Ex-U.S. spending on artificial intelligence (AI) is another potential tailwind for QQQ and QQQM.

“New facilities could be more productive too, something to which developments in artificial intelligence can probably provide a tailwind,” added Todd Asset Management. “We expect spending on development of new energy resources to see continued growth, both in green and traditional hydrocarbons, especially if recession fears get pushed out further. Lastly, the world is a more dangerous place than it has been since before the fall of the Iron Curtain. Governments worldwide are spending more on defense.”

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