The Many Faces of QQQ

The history of QQQ, Invesco QQQ Trust, is that it was a game-changer from the very start. Beginning in 1999 with the development of the Nasdaq-100 index by John Jacobs, then a Nasdaq executive and now a professor at Georgetown and Steven Bloom, the product was an overnight success.  

It was Jacobs’ vision to take advantage of the Nasdaq’s success of getting innovative tech companies to list there just as dial-up internet was in its early stages of adoption by the public.  At the time, Nasdaq’s catch phrase was “the Stock Market for the Next 100 years”.  The index leadership certainly captured that spirit.  Between effective advertising and outrageously high returns in 1999, QQQ captured the imagination of brokers and financial advisors and beyond that even saw meaningful flows from the retail market.  This was unprecedented at the time for the ETF industry.  Even though the SPDR (SPY) had launched in 1993 and a handful of other products followed, SPY, MDY, DIA and 17 country ETFs called WEBS (now iShares-MSCI) were primarily institutional trading products used mainly as proxies for futures.  Success had been measured more by trading volume than asset capture.  QQQ changed all that and paved the way for an avalanche of new products launched in the next 5 years, including iShares and Select Sector SPDRs.  

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However, the tech bubble burst in mid-2000 and QQQ followed a roughly 90% gain in 1999 with three strongly negative years that ate up all the returns realized in the first year and more.  After tech recovered in 2003, QQQ lagged Technology Sector ETFs by SPDRs and iShares.  As a result, QQQ changed its index methodology to exclude financials and others in an effort to return its status as a growth index.  The changes worked so well that the index returned about 14% compounded per annum from 2011 through 2020, much higher than any other major broad index.  QQQ became the ETF of choice for growth and technology.  The purpose of this background is to provide a background of how QQQ became established as one of the most successful ETFs.  Success breeds successors and several offshoot ETFs are offered by major ETF providers: Invesco, Fidelity, Nationwide, Global X, and Direxion.

This week we compare and analyze the usefulness of these offshoot products in general and in terms of the current environment that has been decidedly unfavorable for the technology sector.  The ETFs in question are:

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ONEQ, Fidelity Nasdaq Composite Index ETF. Remarkably this was Fidelity’s first ETF launched in 2003; it was also its only ETF until 2016. The underlying index comprises all domestic and international companies listed in Nasdaq which gives it quite a bit of breadth. Since not all of these companies included in the index are liquid, sampling and optimization techniques are used to manage the ETF.

QQQE, Direxion Nasdaq-100 Equal Weighted Index Shares, a less concentrated version of QQQ that tracks an equal-weighted version of the Nasdaq 100.

QYLD, Global X Nasdaq 100 Covered Call ETF. QYLD seeks yield from the Nasdaq-100 via options premium. Historically, investors came to the Nasdaq for growth, not yield. QYLD, which matches QQQ‘s Nasdaq-100 exposure, but earns income by selling call options and passes it on to investors net of fees.  It is a fund built to maximize income, not capital appreciation.  An unusual feature of QYLD is that it pays income monthly, not quarterly.

NUSI, Nationwide Nasdaq-100 Risk-Managed Income ETF, NUSI is an actively-managed portfolio of stocks included in the Nasdaq-100 Index combined with an options collar. The fund seeks to generate current income with some downside protection. Prior to Dec. 10, 2021, the fund was named Nationwide Risk-Managed Income ETF.

QQQJ, Invesco Nasdaq Next Gen 100 ETF. This ETF tracks a modified market-cap-weighted, narrow index of 100 non-financial stocks that are next-eligible for inclusion in the Nasdaq-100 Index. Unlike the other ETFs in this category, QQQJ contains none of the current Nasdaq-100 stocks. Instead, it contains the NEXT 100 non-financial Nasdaq-listed 100 stocks as ranked by market cap.  Hence, the name “next gen (generation)” ETF.  

QQQM, INVESCO Nasdaq-100 ETF, is simply a lower-fee replica of QQQ with a lower expense ratio and a more efficient management structure that can lend securities and reinvest dividends which QQQ cannot.  As such, almost all investors buying new shares of a Nasdaq-100 ETF should be counseled to buy QQQM in lieu of QQQ.

For our statistical comparison, we use two benchmarks for the Nasdaq-100 index inspired ETFs: VOO, the Vanguard S&P 500 ETF and the Vanguard Information Technology ETF, VGT, the broadest Tech ETF and the one favored by institutional flows. All data reflect the May 20 market close. The following table provides a summary of all nine ETFs.

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  1. The ValuEngine models actually rate all of these tech-focused ETFs to outperform the market in the next six-to-twelve months.  All of the ETFs derived from Nasdaq indexes are ranked 4/5 and VGT, the Vanguard Information Technology Sector ETF gets the highest rating of 5. 
  2. However, the strong buy signals that ValuEngine models have in place for all of these ETFs run contrary to the recommendations of most market pundits.  It’s a daunting proposition to try to pick up falling knives. One possible reason the models may be perceiving an inflection point is the fact that it is also classifying more than 60% of stocks held by QQQ as undervalued.  Just 3 weeks ago, the same models rated more than 60% of the same group of stocks as overvalued.  A week of record declines can do that to financial ratios.
  3. Focusing just on QQQ and QQQM, this is the same exact type of apples-to-apples comparison we highlighted in our blog two weeks ago.  QQQM owns the same exact portfolio as older, larger and iconic QQQ.  Yet, QQQM has an expense ratio that is 25% lower and has outperformed by several basis points in every period since it was launched. Takeaway: if you want to buy the Nasdaq-100 and your liquidity needs are not extreme, buy QQQM in lieu of QQQ.
  4. Focusing on benchmark VOO versus all or the tech-focused ETFs, particularly on the 12-month rolling returns but also on the shorter periods, supports the predominant belief that tech stocks got hammered more than the market as a whole.  Despite all the fears and hand-wringing, the Vanguard S&P 500 ETF only lost 6.2% for the period as compared with between – 12% and -24% for the tech-focused ETFs.
  5. QQQJ is a stellar example of an ETF being manufactured and launched in response to spectacular success enjoyed by ETFs focused on emerging technology companies.  In the wake of the huge success of ARKK and a number of subsequent ETFs focused on identifying emerging technology companies, the idea of an ETF focused on the next 100 companies eligible to join the Nasdaq-100 must have seemed like a can’t-miss idea to the Invesco product development specialists. However, timing is everything and judging by the above return comparison. QQQJ launched at the worst possible time.
  6. Fidelity’s ONEQ has performed a bit better than QQQ more recently and historically in flat-to-down markets. It has generally not performed as well in strong bull markets.  Both relative behaviors are characteristic of indexes with greater breadth.  In terms of number of holdings, it was by far the largest ETF in the study, double the size of VOO and 10 times larger than QQQ and QQQJ.  In fact, ONEQ is the full selection set of all stocks eligible to be held in QQQ.  
  7. DirexionShares QQQE is designed for investors who prefer equally weighted portfolios to cap-weighted portfolios.  It contains the same 100 stocks but rebalances all positions to 1% quarterly. Price appreciation will cause separation in portfolio weights until the next rebalancing.  In the table, we see that Constellation Energy, CEG, is its largest holding at 1.4%.  This indicates that CEG’s price rose 40% more than the average stock in the Nasdaq-100 since the first quarter’s rebalancing.  Implicitly larger allocations to Nasdaq-listed energy and Nasdaq-listed industrials in one large reason that QQQE has lost 280 basis points (+0.28%) than QQQ thus far this year.  It also means that potential QQQE investors should carefully monitor this ratings drift from quarter to quarter and be aware that this index is built to provide less tech industry concentration than QQQ.  This difference may surprise some investment professionals.
  8. QYLD and NUSI are the two ETFs using options to provide income and reduce volatility accomplished both relative to QQQ.  They are designed with older and more conservative investors in mind who value current income and stability over long-term growth.  Certainly, annual yields of 15.3% and 9.9% respectively are in the top 1% of yields produced by all US mutual funds of any type.  The annualized standard deviations of 12.6% and 14% were less than any of the ETFs that did not use options. Accordingly, these are ETFs that I recommend all RIAs to be aware of and to discuss with appropriate clients. Nationwide Financial’s actively managed NUSI, in particular, did an excellent job of weathering the recent storms while continuing to provide stellar income.  
  9. VGT, the Vanguard Technology ETF, beyond providing the institutional benchmark for the technology sector, outperformed QQQ in every historical period including 10 and 15 years (not shown here but available upon request).  Better still, VGT costs half as much as QQQ with an expense ratio of 0.10%. There is an obvious underlying reason for this. All of the ETFs we’ve reviewed based on Nasdaq indexes only include stocks listed on the Nasdaq.  There are also tech stocks such as Texas Instruments (TXN), Hewlett Packard (HWP) and many more that are listed on the NYSE.  Any stocks listed on CBOE Markets are also excluded from consideration.   VGT is the only tech ETF in the study that contains non-Nasdaq tech stocks and that does not include Nasdaq energy or non-tech Nasdaq-listed companies.  Some institutional investors have expressed concern for the exchange listing of a company being a criterion for investment.  VGT addresses that concern.


QQQ is an historically important and iconic ETF that has become a popular shorthand for the US tech sector.  However, it is a suboptimal investment in most time periods.  VGT is the institutional choice for capitalizing on the superior growth potential of technology stocks when economic and market conditions seem favorable.  All of the analysis presented here and beyond support the investment thesis that it is the superior choice in most environments.  

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Advisors with clients that express more concern with income and stability than may wish to learn more about NUSI, the Nationwide Nasdaq-100 Risk-Managed Income ETF.  A concern may be less than two years of history for an actively managed fund.   Thus far, however, its managers have delivered well on its objectives.  QYLD has almost 10 years of history and 60% more yield.  It is also worthy of consideration.  However, without NUSI’s collared approach and with a full-income-distribution policy, it is more likely to experience more impactful capital drawdown than NUSI. 

Is this the right time to buy tech ETFs?  The ValuEngine models think so.  However, quant models are notorious for being early at calling market inflection points.  Time will tell. The most important finding of this study is that when the time actually is right, VGT is probably a better choice for sector deployment than any of the Nasdaq-100-inspired ETFs if growth is the primary objective.

By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
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