The Invesco QQQ (QQQ), and its lower-cost sibling Invesco NASDAQ 100 ETF (QQQM), soared 40% year-to-date as of September 7, more than double that of the broad S&P 500 Index based ETFs in 2023. While there are lots of reasons to celebrate the growth stocks inside the NASDAQ 100 index, some advisors might be looking for alternatives to the market-cap weighted index ETFs that reduce their risk profile. Thankfully there are some choices to consider.
See related: What’s Inside QQQ and QQQM Is Going to Change (a Little)
A NASDAQ 100 ETF That Loves its Children Equally
The Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE) holds the same stocks of the 100 large-cap companies found in QQQ and QQQM but in different proportions. For example, Apple and Microsoft recently represent 12% and 10% of QQQ and QQQM assets respectively. However, these companies were only approximately 1% of assets in QQQE.
Meanwhile, more moderately sized companies like Baker Hughes, Charter Communications, and Intuit had slightly higher weightings in QQQE due to recent price appreciation since the quarterly rebalance. Yes, there are energy stocks within the NASDAQ-100 Index. It is not just a collection of innovative information technology and communications services companies.
The more diversified approach might appeal to advisors concerned about the risks of a large stakes in a handful of companies. QQQE has a 0.35% expense ratio, higher than QQQ (0.20%) and QQQM (0.15%) and had risen 22% in value thus far in 2023.
Covered Call ETFs Provide Income Boost to Growth Stocks
The Global X NASDAQ 100 Covered Call ETF (QYLD) and the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) both use options on the Nasdaq to generate above-average income. However, there are differences between them.
For example, QYLD has a similar market-cap weighting index approach as QQQ and QQQM owning stakes in all 100 companies. In contrast, JEPQ is actively managed and holds just 87 positions. Management leverages a fundamental security selection approach.
JEPQ and QYLD had 12-month trailing yields of 12.5% and 12.3%, respectively. These are impressive given that some Nasdaq-100 companies do not pay dividends. JEPQ charges an expense ratio of 0.35% and was up 27% thus far in 2023, while QYLD’s fee and 2023 total return were 0.60% and 19%, respectively.
The Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI) is an options trading fund that seeks to produce high income using the Nasdaq-100 index. The ETF owns all the stocks in the index and uses a rules-based options collar strategy. A long put is held for a month and short call may be held based on market developments. NUSI has a 0.68% expense ratio. The fund’s trailing 12-month yield was recently 7.4% and its year-to-date total return was 19%.
These three income-generating ETFs provide a less volatile approach to having growth securities in the portfolio.
Growth Stocks with a Build-in Buffer
The Innovator Growth-100 Power Buffer (NJUL) tracks the returns of QQQ up to a predetermined cap of 17%, while buffering investors against the first 15% of losses over a 12-month period. NJUL is part of a quarterly series, the next one to reset will be for October. The defined outcome ETF uses ETF options rather than owning Apple, Microsoft, and Intuit shares directly.
NJUL has a 0.79% expense ratio and was up 21% thus far in 2023, part of which occurred as part of a different 12-month outcome period.
It’s easy to find the appeal of the many of the growth stocks inside the Nasdaq-100 index. But advisors should be aware they can gain exposure in more diversified and/or more risk-mitigated manners.
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