{"id":2896,"date":"2022-05-31T16:26:59","date_gmt":"2022-05-31T16:26:59","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=2896"},"modified":"2022-05-31T16:51:57","modified_gmt":"2022-05-31T16:51:57","slug":"the-many-faces-of-qqq","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/the-many-faces-of-qqq\/","title":{"rendered":"The Many Faces of QQQ"},"content":{"rendered":"

The history of <\/span>QQQ, <\/b>Invesco QQQ Trust,<\/span> 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.\u00a0\u00a0<\/span><\/p>\n

It was Jacobs\u2019 vision to take advantage of the Nasdaq\u2019s success of getting innovative tech companies to list there just as dial-up internet was in its early stages of adoption by the public.\u00a0 At the time, Nasdaq\u2019s catch phrase was \u201cthe Stock Market for the Next 100 years\u201d.\u00a0 The index leadership certainly captured that spirit.\u00a0 Between effective advertising and outrageously high returns in 1999, <\/span>QQQ<\/b> captured the imagination of brokers and financial advisors and beyond that even saw meaningful flows from the retail market.\u00a0 This was unprecedented at the time for the ETF industry.\u00a0 Even though the SPDR (<\/span>SPY<\/b>) had launched in 1993 and a handful of other products followed, <\/span>SPY, MDY, DIA <\/b>and 17 country ETFs called WEBS (now iShares-MSCI) were primarily institutional trading products used mainly as proxies for futures.\u00a0 Success had been measured more by trading volume than asset capture.\u00a0 <\/span>QQQ <\/b>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.\u00a0\u00a0<\/span><\/p>\n

All of the approximately 5,000 stocks, 16 sector groups, 140 industries, and 500 ETFs have been updated on\u00a0<\/b>www.ValuEngine.com<\/b><\/a><\/h5>\n
Free Two Week Trial to all 5,000 plus equities and ETFs covered by ValuEngine\u00a0<\/b>HERE<\/b><\/a><\/h5>\n

However, the tech bubble burst in mid-2000 and <\/span>QQQ <\/b>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.\u00a0 After tech recovered in 2003, <\/span>QQQ <\/b>lagged Technology Sector ETFs by SPDRs and iShares.\u00a0 As a result, <\/span>QQQ <\/b>changed its index methodology to exclude financials and others in an effort to return its status as a growth index.\u00a0 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.\u00a0 <\/span>QQQ <\/b>became the <\/span>ETF <\/b>of choice for growth and technology.\u00a0 The purpose of this background is to provide a background of how <\/span>QQQ <\/b>became established as one of the most successful <\/span>ETFs.\u00a0 <\/b>Success breeds successors and several offshoot ETFs are offered by major ETF providers: Invesco, Fidelity, Nationwide, Global X, and Direxion.<\/span><\/p>\n

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.\u00a0 The ETFs in question are:<\/span><\/p>\n

Current ValuEngine reports on these ETF\u2019s can be viewed\u00a0<\/b>HERE<\/b><\/a><\/h5>\n

ONEQ,<\/b> Fidelity Nasdaq Composite Index ETF. Remarkably this was Fidelity\u2019s first ETF launched in 2003; it was also its only ETF until 2016. The underlying index comprises <\/span>all <\/span><\/i>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.<\/span><\/p>\n

QQQE<\/b>, Direxion Nasdaq-100 Equal Weighted Index Shares, a less concentrated version of QQQ that tracks an equal-weighted version of the Nasdaq 100.<\/span><\/p>\n

QYLD, <\/b>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. <\/span>QYLD<\/b>, which matches <\/span>QQQ<\/b>‘s Nasdaq-100 exposure, but earns income by selling call options and passes it on to investors net of fees.\u00a0 It is a fund built to maximize income, not capital appreciation.\u00a0 An unusual feature of <\/span>QYLD<\/b> is that it pays income monthly, not quarterly.<\/span><\/p>\n

NUSI, <\/b>Nationwide Nasdaq-100 Risk-Managed Income ETF, NUSI is an <\/span>actively-managed<\/span><\/i> 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.<\/span><\/p>\n

QQQJ, <\/b>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, <\/span>QQQJ <\/b>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.\u00a0 Hence, the name \u201cnext gen (generation)\u201d ETF.\u00a0\u00a0<\/span><\/p>\n

QQQM, <\/b>INVESCO Nasdaq-100 ETF, is simply a lower-fee replica of <\/span>QQQ<\/b> with a lower expense ratio and a more efficient management structure that can lend securities and reinvest dividends which <\/span>QQQ <\/b>cannot.\u00a0 As such, almost all investors <\/span>buying new shares<\/span><\/i> of a Nasdaq-100 ETF should be counseled to buy <\/span>QQQM <\/b>in lieu of <\/span>QQQ.<\/b><\/p>\n

For our statistical comparison, we use two benchmarks for the Nasdaq-100 index inspired ETFs: <\/span>VOO<\/b>, the Vanguard S&P 500 ETF and the Vanguard Information Technology ETF, <\/span>VGT, <\/b>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.<\/span><\/p>\n

220531 blog chart<\/a><\/h5>\n
Current ValuEngine reports on these ETF\u2019s can be viewed\u00a0<\/b>HERE<\/b><\/a><\/h5>\n

Observations<\/b><\/p>\n

    \n
  1. The ValuEngine models actually rate all of these tech-focused ETFs to outperform the market in the next six-to-twelve months.\u00a0 All of the ETFs derived from Nasdaq indexes are ranked 4\/5 and <\/span>VGT, <\/b>the Vanguard Information Technology Sector ETF gets the highest rating of 5.\u00a0<\/span><\/li>\n
  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.\u00a0 It\u2019s 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 <\/span>QQQ <\/b>as undervalued.\u00a0 Just 3 weeks ago, the same models rated more than 60% of the same group of stocks as overvalued.\u00a0 A week of record declines can do that to financial ratios.<\/span>
    \n<\/span><\/li>\n
  3. Focusing just on <\/span>QQQ <\/b>and <\/span>QQQM, <\/b>this is the same exact type of apples-to-apples comparison we highlighted in our blog two weeks ago.\u00a0 <\/span>QQQM <\/b>owns the same exact portfolio as older, larger and iconic <\/span>QQQ.\u00a0 <\/b>Yet, <\/span>QQQM <\/b>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 <\/span>QQQM <\/b>in lieu of <\/span>QQQ.<\/b><\/li>\n
  4. Focusing on benchmark <\/span>VOO <\/b>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.\u00a0 Despite all the fears and hand-wringing, the Vanguard S&P 500 ETF only lost 6.2% for the period as compared with between \u2013 12% and -24% for the tech-focused ETFs.<\/span><\/li>\n
  5. QQQJ <\/b>is a stellar example of an ETF being manufactured and launched in response to spectacular success enjoyed by ETFs focused on emerging technology companies.\u00a0 In the wake of the huge success of <\/span>ARKK <\/b>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\u2019t-miss idea to the Invesco product development specialists. However, timing is everything and judging by the above return comparison. <\/span>QQQJ <\/b>launched at the worst possible time.<\/span><\/li>\n
  6. Fidelity\u2019s <\/span>ONEQ <\/b>has performed a bit better than <\/span>QQQ <\/b>more recently and historically in flat-to-down markets. It has generally not performed as well in strong bull markets.\u00a0 Both relative behaviors are characteristic of indexes with greater breadth.\u00a0 In terms of number of holdings, it was by far the largest ETF in the study, double the size of <\/span>VOO<\/b> and 10 times larger than <\/span>QQQ <\/b>and <\/span>QQQJ.\u00a0 <\/b>In fact, <\/span>ONEQ <\/b>is the full selection set of all stocks eligible to be held in QQQ.\u00a0\u00a0<\/span><\/li>\n
  7. DirexionShares <\/span>QQQE <\/b>is designed for investors who prefer equally weighted portfolios to cap-weighted portfolios.\u00a0 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.\u00a0 In the table, we see that Constellation Energy, <\/span>CEG, <\/b>is its largest holding at 1.4%.\u00a0 This indicates that <\/span>CEG<\/b>\u2019s price rose 40% more than the average stock in the Nasdaq-100 since the first quarter\u2019s rebalancing.\u00a0 Implicitly larger allocations to Nasdaq-listed energy and Nasdaq-listed industrials in one large reason that <\/span>QQQE <\/b>has lost 280 basis points (+0.28%) than <\/span>QQQ <\/b>thus far this year.\u00a0 It also means that potential <\/span>QQQE <\/b>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 <\/span>QQQ.\u00a0 <\/b>This difference may surprise some investment professionals.<\/span><\/li>\n
  8. QYLD <\/b>and <\/span>NUSI <\/b>are the two ETFs using options to provide income and reduce volatility accomplished both relative to <\/span>QQQ. <\/b>\u00a0They are designed with older and more conservative investors in mind who value current income and stability over long-term growth.\u00a0 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.\u00a0 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.<\/span> Nationwide Financial\u2019s actively managed <\/span>NUSI, <\/b>in particular, did an excellent job of weathering the recent storms while continuing to provide stellar income.\u00a0\u00a0<\/span><\/li>\n
  9. VGT, <\/b>the Vanguard Technology ETF, beyond providing the institutional benchmark for the technology sector, outperformed <\/span>QQQ <\/b>in every historical period including 10 and 15 years (not shown here but available upon request).\u00a0 Better still, <\/span>VGT <\/b>costs half as much as <\/span>QQQ <\/b>with an expense ratio of 0.10%. There is an obvious underlying reason for this. All of the ETFs we\u2019ve reviewed based on Nasdaq indexes only include stocks listed on the Nasdaq.\u00a0 There are also tech stocks such as Texas Instruments (<\/span>TXN)<\/b>, Hewlett Packard <\/span>(HWP)<\/b> and many more that are listed on the NYSE.\u00a0 Any stocks listed on CBOE Markets are also excluded from consideration.\u00a0 <\/span>\u00a0VGT <\/b>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.\u00a0 Some institutional investors have expressed concern for the exchange listing of a company being a criterion for investment.\u00a0 <\/span>VGT <\/b>addresses that concern.<\/span><\/li>\n<\/ol>\n

    Conclusions<\/b><\/p>\n

    QQQ <\/b>is an historically important and iconic ETF that has become a popular shorthand for the US tech sector.\u00a0 However, it is a suboptimal investment in most time periods.\u00a0 <\/span>VGT <\/b>is the<\/span> institutional choice for capitalizing on the superior growth potential of technology stocks when economic and market conditions seem favorable.\u00a0 All of the analysis presented here and beyond support the investment thesis that it is the superior choice in most environments.\u00a0\u00a0<\/span><\/p>\n

    Financial Advisory Services based on ValuEngine research available: \u00a0\u00a0<\/b>www.ValuEngineCapital.com<\/b><\/a>\u00a0\u00a0<\/b><\/h5>\n

    Advisors with clients that express more concern with income and stability than may wish to learn more about <\/span>NUSI<\/b>, the Nationwide Nasdaq-100 Risk-Managed Income ETF.\u00a0 A concern may be less than two years of history for an actively managed fund. \u00a0 Thus far, however, its managers have delivered well on its objectives.\u00a0 <\/span>QYLD <\/b>has almost 10 years of history and 60% more yield.\u00a0 It is also worthy of consideration.\u00a0 However, without <\/span>NUSI<\/b>\u2019s collared approach and with a full-income-distribution policy, it is more likely to experience more impactful capital drawdown than <\/span>NUSI.\u00a0<\/b><\/p>\n

    Is this the right time to buy tech ETFs?\u00a0 The ValuEngine models think so.\u00a0 However, quant models are notorious for being early at calling market inflection points.\u00a0 Time will tell. The most important finding of this study is that when the time actually <\/span>is <\/span><\/i>right, <\/span>VGT <\/b>is probably a better choice for sector deployment than any of the Nasdaq-100-inspired ETFs if growth is the primary objective.<\/span><\/p>\n

    By Herbert Blank<\/b><\/h5>\n
    Senior Quantitative Analyst, ValuEngine Inc<\/b><\/h5>\n
    www.ValuEngine.com<\/b><\/a><\/h5>\n
    support@ValuEngine.com<\/b><\/h5>\n
    _______________________________________________<\/b><\/h5>\n
    All of the approximately 5,000 stocks, 16 sector groups, 140 industries, and 600 ETFs have been updated on\u00a0<\/b>www.ValuEngine.com<\/b><\/a><\/h5>\n
    Financial Advisory Services based on ValuEngine research available through\u00a0<\/b>ValuEngine Capital Management, LLC<\/b><\/a><\/h5>\n
    Free Two Week Trial to all 5,000 plus equities covered by ValuEngine\u00a0<\/b>HERE<\/b><\/a><\/h5>\n
    Subscribers log in\u00a0<\/b>HERE<\/b><\/a><\/h5>\n","protected":false},"excerpt":{"rendered":"

    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.\u00a0\u00a0 It was Jacobs\u2019 vision to take … Read more<\/a><\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[130,1,39],"tags":[1760,1761,1719,1731,2008,2007,1617,2004,2005,2006,2011,1510,1713,1921,367,2010,28,1659,63,2009,1768],"_links":{"self":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2896"}],"collection":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/comments?post=2896"}],"version-history":[{"count":9,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2896\/revisions"}],"predecessor-version":[{"id":2907,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2896\/revisions\/2907"}],"wp:attachment":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/media?parent=2896"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/categories?post=2896"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/tags?post=2896"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}