As has been widely reported, a small number of stocks are driving the S&P 500 this year, and it’s a small number that accounts for a significant portion of the index’s weight.
To be precise, nine stocks combine for about a quarter of the S&P 500’s roster, and all nine are also members of the Nasdaq-100 Index (NDX), meaning that all nine are components of the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). Both of those exchange traded funds benchmark to the Nasdaq-100 Index.
A predictable result of tech equities such as Google parent Alphabet (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), and chip giants Advanced Micro Devices (NASDAQ: AMD) and Nvidia (NASDAQ: NVDA) generating headlines is that retail investors rush to these names. Another prime example is Apple (NASDAQ: AAPL), which is the second-largest QQQ and QQQM component and is found in nearly 20% of retail investors’ portfolios.
QQQM, in particular, could be a better option for capital-constrained investors than spreading bets across the aforementioned stocks, as could other popular Nasdaq-listed funds. After all, an ETF such as QQQM removes the stock-picking burden and offers investors upside participation in a variety of stocks — relevant traits at a time when many QQQ and QQQM holdings remain below all-time highs.
“Even with this year’s gains, most tech stocks are still well below their records. Meta shares, for example, are 37% below their 2021 high. The average individual investor’s brokerage portfolio had shed about a quarter of its value from a November 2021 peak, according to Vanda’s estimates as of last week,” reported Hannah Miao for the Wall Street Journal.
Meta refers to Facebook parent Meta Platforms (NASDAQ: META), which accounts for 4.11% of the QQQ and QQQM rosters. It’s one of the nine stocks that account for 25% of the S&P 500 when combined. However, that percentage doubles among retail investor portfolios.
Although QQQ and QQQM are concentrated relative to some other broad market strategies, the ETFs offer tech investors some benefits beyond removing stock picking and market timing. Those include allowing retail investors to embrace a broad menu of stocks, some of which have elevated share prices — a trait some retail market participants often balk at.
“Higher share prices also run the risk of making stocks appear more expensive relative to companies’ profits,” according to the Journal.
With QQQM, investors gain the benefit of a modest 0.15% annual expense ratio, making the ETF appealing for long-term market participants.
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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.
