ETF Of The Week: The Weirdest Fund Turns 20

How do you explain a fund like the Invesco QQQ Trust (QQQ)?

The sixth-largest ETF by assets, and the second-most-actively traded, QQQ (sometimes called “the Q’s”) defies easy explanation. Is it a tech market proxy? A large-cap growth fund? A thematic, “innovation” ETF?

It’s none of these, says FactSet’s Director of Research Elisabeth Kashner: “It’s a Rorschach test.”

QQQ is many things to many different people, she explains. With over $67 billion in assets under management, QQQ is one of the largest ETFs in existence; in fact, the fund is so popular, it accounts for $1 of every $50 invested in U.S. ETFs. But pinning down exactly what investors use QQQ for is no easy task.

“The Q’s are such a mystery to me that I don’t quite know what investors think they’re getting when they put money into the fund,” Kashner added.

Tech Fund That Wasn’t

QQQ’s benchmark is the Nasdaq-100 Index, which tracks the top 100 stocks by market cap listed on the Nasdaq Stock Exchange, excluding financials.

Once upon a time, that meant tech stocks: In 2000, one year after QQQ launched, a full 78% of the index (and QQQ) was allocated to the tech sector (right during the worst of the dot-com crash). Indeed, for years afterward, QQQ was dominated by its significant allocation to Microsoft (MSFT) and, later, to Apple (AAPL).

Today however, tech stocks comprise only 60% of QQQ. Most of that is in the handful of “FAANG” stocks: Facebook (FB) (5%), Amazon (AMZA) (9%), Apple (10%), Netflix (NFLX) (2%), Alphabet (GOOGL) (10%) and Microsoft (10%). Meanwhile, another 21% of QQQ is in consumer cyclical stocks, like Pepsi (PEP) and Costco (COST), while another 9% is in health care stocks.

Yet traders still use QQQ as a proxy for the tech industry, and when tech swings, so too do flows in and out of QQQ. For example, since tech stocks began to droop back in October, QQQ has seen net outflows of $2.6 billion.

For his part, John Frank, QQQ’s equity product strategist for Invesco, resists the description of QQQ as a tech fund.

“I don’t think QQQ is necessarily about technology, but about technology-enabled companies. It’s about innovation,” he said. “These are today’s companies which are changing the economy for the better and growing well. It’s almost sector-agnostic.”

Good Growth, Better Long-Term Performance

Frank argues that QQQ is better understood as a large-cap growth fund, citing the above-average R&D budgets and investment by Nasdaq-100 companies, as compared to S&P 500 companies.

The idea of QQQ as a large-cap growth ETF makes some sense. For example, the fund’s price-to-earnings ratio is roughly 24, placing it solidly at market average, while its price-to-book ratio is relatively high at 5.6.

Yet comparable—or better—metrics are available from other dedicated large-cap growth funds, such as the $42 billion iShares Russell 1000 Growth ETF (IWF), which has a P/E ratio of 25 and a P/B ratio of 7.0.

However, what QQQ offers is fairly strong risk-adjusted returns, especially over the long term. Over the past 10 years, the fund has returned 21%, compared to the SPDR S&P 500 ETF Trust (SPY)’s 16% and IWF’s 18%.

 

Source: StockCharts.com; data range 3/14/16 – 3/14/19

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