ETF Trends CEO Tom Lydon discussed the Invesco QQQ ETF (QQQ) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
This ETF offers exposure to one of the world’s most widely-followed equity benchmarks, the NASDAQ, and has become one of the most popular exchange-traded products. The significant average daily trading volumes reflect that QQQ is widely used as a trading vehicle, and less as components of a balanced long-term strategy. Of course, this fund can certainly be useful as part of a buy-and-hold approach for investors looking to maintain a tilt towards the potentially volatile tech sector.
QQQ is an excellent core ETF investment that helps investors capture some of the largest growth names out there. It is rated among the top 1%, best-performing large-cap growth funds over the past ten years by Lipper and Morningstar.
Related: ETF of the Week: ARK Genomic Revolution Multi-Sector Fund (ARKG)
Since its formation in 1999, QQQ has demonstrated a history of outperformance, consistently beating the S&P 500 Index. It is the 2nd most traded ETF in the US-based on the average daily volume traded, as of March 31, 2020. It is also one of the most popular ETF plays of 2020, with +$8.2 billion net inflows year-to-date. Additionally, QQQ, which tracks the Nasdaq-100, has returned above its long-term trend line at the 200-day moving average. It is +3.2% year-to-date performance
To clarify, the Nasdaq-100 focuses on the largest nonfinancial stocks on the Nasdaq. It has considerable exposure to multinational industry leaders, such as Apple AAPL, Alphabet GOOG, Microsoft MSFT, Amazon.com AMZN, and Facebook FB. Additionally, the holdings generate attractive returns on invested capital and enjoy durable competitive advantages.
Heavily Tied To Tech
Technology companies are usually less indebted than the broader equity market because they require less physical capital to operate. Since the tech sector tends to evolve quickly, most technology companies reinvest most of their profits into research and development to fuel growth rather than paying them out as dividends.
Most of these firms trade at higher valuations than the broad market, reflecting their greater growth potential. However, if these firms fall short of the growth expectations embedded in their prices, they could underperform. There is no limit on the valuations the fund will pay for its holdings.
Communication services, consumer cyclical, and healthcare stocks represent the fund’s next-largest sector weightings. Additionally, communication services, a relatively new sector, covers all those internet-related names that are relatively more insulated from the coronavirus outbreak as more stay at home. Consumer cyclical stocks tend to be more sensitive to market fluctuations (higher beta) than most. Healthcare stocks tend to be more defensive.
QQQ has not been exposed to the underperformance in financials, industrials, and energy. However, as Tom Lydon states, “12 months from now, are we going to continue to be close to an uptrend. If not, you might want to make some tweaks to your portfolio. And I think certain sectors are going to continue being hurt. There are also going to be some areas of the market where they’re probably going to be buoyed by what’s going on, and I think QQQ is part of it.”
Listen to the full podcast episode on QQQ ETF:
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