Lots of Alpha-Generating Opportunities Found in These ETFs

In financial parlance, alpha is defined as an investment’s risk-adjusted returns in excess of a particular benchmark. Put simply, generating it is hard, and plenty of professionals struggle to consistently accomplish the feat.

All of that may imply that the only way for an investor to obtain alpha is to embrace active management. In some cases, active managers can and do generate alpha. However, some passive strategies do as well, including exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM).

QQQ and QQQM each hold 101 stocks. While that number isn’t expansive relative to other broad market ETFs, that doesn’t diminish the alpha-generating potential of these funds. In fact, QQQ and QQQM are homes to a variety of stocks that could be alpha stars.

Inside QQQ, QQQM Alpha Potential

In a recent note to clients, Goldman Sachs chief U.S. equity strategist David Kostin examined near-term alpha-generating opportunities.

“A micro-driven market typically means more opportunity for stock pickers to capture alpha,” he wrote. “The best stock picking opportunities arise in sectors where returns are driven by micro factors and the typical company in the sector carries a high level of firm-specific risk.”

The bank unveiled a list of 25 stocks likely to be more driven by stock-specific factors than macroeconomic headlines. This indicates that those names could be credible alpha-generating candidates. Investors don’t need to buy all those stocks or even pick and choose among the lot; many of the names on the Goldman list are QQQ and QQQM components. Take the case of COVID-19 vaccine maker Moderna (NASDAQ: MRNA), which is one of the ETFs’ healthcare holdings.

Moderna is “one of the stocks best situated to generate the largest alpha, with a consensus price target implying the largest upside of the group, at about 71%. Shares have slumped about 44% year to date and lost 9% last week alone as the vaccine maker reported a decline in second-quarter revenues and a quarterly loss but lifted its Covid vaccine outlook,” reported Samantha Subin for CNBC.

Illumina (NASDAQ: ILMN) also made an appearance on the Goldman list. Netflix (NASDAQ: NFLX), which is the fourth-largest communication services holding in the ETFs, also made the cut.

“These stocks ultimately present alpha generating opportunities for investors to apply directional views on fundamental outlooks or near-term catalysts,” Kostin noted of the ideas put forth by Goldman.

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