{"id":3388,"date":"2024-09-22T04:03:17","date_gmt":"2024-09-22T04:03:17","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=3388"},"modified":"2024-11-07T03:55:26","modified_gmt":"2024-11-07T03:55:26","slug":"beyond-qqq-two-nasdaq-etfs-for-finding-potential-future-tech-superstars","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/beyond-qqq-two-nasdaq-etfs-for-finding-potential-future-tech-superstars\/","title":{"rendered":"Beyond QQQ: Two Nasdaq ETFs for Finding Potential Future Tech Superstars"},"content":{"rendered":"

The Nasdaq-100 Trust ETF, ticker symbol <\/span>QQQ<\/b>, is both one of the most loved and most hated ETFs in the US market. \u00a0 Investors who bought and held $10,000 worth 15 years ago on September 10, 2009 have every reason to love it.\u00a0 They now have seen that investment grow to $126,000, an annualized gain of 18.4%.\u00a0 Very few non-leveraged ETFs could even approach this growth, especially considering that less than 20% of the US ETFs that are traded today even existed in 2009.\u00a0 In contrast, <\/span>SPY<\/b>, the S&P 500 Trust managed by SSgA SPDRs, has grown by an annualized 13.8% during the same period.\u00a0\u00a0<\/span><\/p>\n

All 5,000 stocks, 16 sector groups, 140 industries, and 500 ETFs have been updated:<\/b><\/h5>\n
Two-week free trial:<\/b> www.ValuEngine.com<\/b><\/a><\/h5>\n

This table, courtesy of FinanceCharts.com, shows that the performance of <\/span>QQQ <\/b>dominated other benchmark ETFs during the past five- and ten- year periods on a cumulative basis \u2013 as distinct from compound annualized.<\/span><\/p>\n

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That growth rate is still quite impressive and higher than more than 80% of actively managed mutual funds with large cap core mandates.\u00a0 Why is <\/span>QQQ<\/b> hated?\u00a0\u00a0<\/span><\/p>\n

Most strategists believe it is grossly overvalued and near the top of its cycle.\u00a0 It\u2019s considered a 15-year bubble that is about to burst.\u00a0 Many professionals recommend at least partial divestment at this time. Two major reasons are correlation and concentration.\u00a0 Out of its 100 holdings, the ten largest holdings of <\/span>QQQ <\/b>constitute 49.8%, roughly half, of its portfolio.\u00a0 Of those ten, only Costco Wholesale (<\/span>COST<\/b>) is not a tech stock.\u00a0\u00a0<\/span><\/p>\n

Current ValuEngine reports on all covered stocks and ETFS can be viewed<\/b> HERE<\/b><\/a><\/h5>\n

From the ValuEngine report page on QQQ, here are the holdings and some context:<\/span><\/p>\n

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Overall, ValuEngine classifies 61.6% of the portfolio’s holdings as being in the technology sector.\u00a0 In contrast, the top 10 positions of Invesco equally weighted S&P 500 ETF (<\/span>RSP) <\/b>was only 2.2% of the full portfolio.\u00a0 However, concentration is far from the only risk.<\/span><\/p>\n

That said, ValuEngine is not nearly as convinced as <\/span>QQQ<\/b>\u2019s vocal critics that now is the time to trim or sell.\u00a0 Our predictive model rates it a buy, giving it <\/span>4<\/b> out of a possible 5, in comparison with a <\/span>3 <\/b>(Hold) for RSP.\u00a0\u00a0<\/span><\/p>\n

From the perspective of our valuation model, about 44% of its holdings are undervalued and 56% are overvalued.\u00a0 That tips it towards over-valued but not by any more than the market as a whole, and not unusual.\u00a0 In contrast, the same model rates more than 70% of companies in <\/span>SPY<\/b> (and <\/span>RSP <\/b>with identical holdings)<\/span> as overvalued and our predictive model rates it a <\/span>3 <\/b>(Hold).\u00a0 That said, the only one of the top 10 holdings of <\/span>QQQ <\/b>to earn a buy rating as an individual stock is Amazon Corp. (<\/span>AMZN).\u00a0\u00a0<\/b><\/p>\n

Market pricing tends to be future oriented and growth stocks fetch more of a fair-value premium than value stocks.\u00a0 This is especially true if value is being measured by backward-looking ratios such as Price\/Earnings.\u00a0 At some time, however, today\u2019s growth stocks become tomorrow\u2019s value stocks as the company inevitably progresses from its growth phase into its value stage.\u00a0 Such maturing stocks will eventually be repriced by the market.\u00a0 Many of the aforementioned strategists suggest that rather than take such risks, investors reducing <\/span>QQQ <\/b>positions should buy active or passive value ETFs instead.\u00a0\u00a0<\/span><\/p>\n

I personally find this a bit of a leap.\u00a0 In addition to the fact that our research and models still finds <\/span>QQQ <\/b>attractive, \u201cone size fits all\u201d never applies to the clients of money managers.\u00a0 Specifically, a client that has been holding <\/span>QQQ <\/b>likely has capital appreciation over income and\/or capital preservation as the top goal for her or his portfolio.\u00a0 If so, moving dollars out of <\/span>QQQ<\/b> and into a US value ETF such as the Vanguard Value ETF (<\/span>VTV<\/b>) may not result in the desired results for the client.\u00a0\u00a0<\/span><\/p>\n

Growth related to technology investing is generally a function of innovation.\u00a0 Stocks currently in <\/span>QQQ <\/b>will eventually leave the portfolio to be replaced by new leaders, such as the recent examples of NVDIA Corp. (<\/span>NVDA<\/b>) and Broadcom (<\/span>AVGO<\/b>).\u00a0 They were both midcap stocks on the Nasdaq Exchange before they became titans.\u00a0 In other words, the true potential for capital appreciation in technology for growth investors is identifying the tech leaders of tomorrow that will be included in the Nasdaq-100 in the future.\u00a0 This perhaps can offer better growth than buying the companies already known to be the current tech leaders.\u00a0\u00a0<\/span><\/p>\n

For investors trying to identify these future leaders, Nasdaq and Invesco have teamed up to create two index-based ETFs with the tickers <\/span>QQQJ<\/b> and <\/span>QQQS.<\/b><\/p>\n

QQQJ <\/b>is the ticker symbol for the <\/span>Nasdaq Next Gen 100 ETF<\/b>.\u00a0 This index ETF contains the largest 100 non-financial Nasdaq-listed companies that are not in the Nasdaq 100. Another way to think about it is that this constituent list is #101 through #200 of qualifying stocks as ranked by float-weighted market capitalization.\u00a0 The idea behind the fund is that the Nasdaq-listed companies in QQQJ may be mid-cap stocks early in their growth cycle with the potential to “graduate” to the Nasdaq-100 Index and lead the next generation of tech leaders.\u00a0 One potential benefit is that It offers a liquid way to get exposure to leading mid-cap growth stocks without single stock risk.\u00a0 In contrast, the assets-under-management (AUM) leader accessing a portfolio of midcap stocks is the S&P 400 Midcap Trust (<\/span>MDY<\/b>) offered by SPDRs. However, that ETF contains a number of regional banks and utilities that are not growth stocks.\u00a0 <\/span>QQQJ <\/b>contains neither banks nor utilities. Its annual expense ratio is just 0.15% making it one of the least expensive ETFs in its category.<\/span><\/p>\n

QQQJ <\/b>debuted in October 2020. By the end of next month, it will have four full years of historical performance.\u00a0 So far, the results have been mixed.\u00a0 Its returns during that period have badly lagged those of <\/span>QQQ <\/b>and <\/span>SPY.\u00a0 <\/b>\u00a0Here are some insights from the ValuEngine research report.\u00a0\u00a0<\/span><\/p>\n

Current ValuEngine reports on all covered stocks and ETFS can be viewed<\/b> HERE<\/b><\/a><\/h5>\n

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QQQJ <\/b>is currently rated a <\/span>4 <\/b>(Buy) by our predictive ranking system.\u00a0 Its Beta of 1.12 is surprisingly low for a midcap tech portfolio.\u00a0 The second page of this report provides more ratios as well as important data about its holdings.\u00a0 <\/span><\/p>\n

Current ValuEngine reports on all covered stocks and ETFS can be viewed<\/b> HERE<\/b><\/a><\/h5>\n

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Interestingly and somewhat counterintuitively, more than half of the stocks in <\/span>QQQJ <\/b>are classified as undervalued by the ValuEngine valuation model.\u00a0 Veteran investors such as myself generally think of midcap tech stocks as having relatively high valuations but our model indicated that is not the case here.\u00a0 In terms of top 10 holdings, there are three stocks rated <\/span>4 <\/b>(Buy) by our predictive model: NetApp Inc. (<\/span>NTAP<\/b>); eBay (<\/span>EBAY<\/b>); and Western Digital (<\/span>WDC<\/b>). At the other end of the spectrum, the top holding and representing 3.5% of <\/span>QQQJ,<\/b> is Super Micro Com (<\/span>SMCI)<\/b>, a \u201cfallen angel\u201d with a 6-month return of -57% that may still be falling.\u00a0 We rate it a <\/span>1<\/b> (Strong Sell).\u00a0<\/span><\/p>\n

The Invesco NASDAQ Future Gen 200 ETF (QQQS)<\/b>\u00a0is an even more recent innovation, having just finished 12 months of live performance.\u00a0 On paper, its design is quite intriguing.\u00a0 QQQS provides access to small-cap companies with promising patent portfolios relative to their total market value as deemed by Nasdaq.\u00a0<\/span><\/p>\n

The theory is that valuable patents help companies to gain competitive advantages and garner likely revenue growth. <\/span>QQQS<\/b> will invest at least 90% of its total assets in the securities that comprise the index. Healthcare (55.65%) and Information Technology (30.51%) are the top two sectors of the fund.<\/span><\/p>\n

The fund holds about 199 stocks in total. The eligible universe consists of the companies within the Nasdaq Composite Index, barring those companies included on the Nasdaq-100 Index and Nasdaq Next Generation 100 Index. Each constituent within the index is equally weighted. The fund charges just 20 bps in fees, again highly competitive in the small cap technology space. No stock may account for more than 2% of the fund.<\/span><\/p>\n

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The above screenshot from the ValuEngine page illustrates that its price behavior thus far has paralleled that of <\/span>QQQ<\/b> but has underperformed it significantly.\u00a0 This is unsurprising given the large cap tech stock dominance during the first half of this year.\u00a0 Its Beta is 2.47 making it much more volatile than <\/span>QQQJ. <\/b>In terms of predicted performance, our model likes <\/span>QQQS <\/b>even more than <\/span>QQQJ <\/b>with our highest rating of <\/span>5 <\/b>(Strong Buy).<\/span><\/p>\n

Here’s a thought-provoking idea on how an investor might use <\/span>QQQS<\/b> from a research note by Sanghamitra Saha of Zacks.\u00a0<\/span><\/p>\n

\u201cApart from competitive advantages in the same business, a strategic patent portfolio improves valuation of the company and puts that company in an advantageous position during M&A deals. Higher revenues generated from those patents also make up for the high R&D costs incurred by those companies in building those patents.<\/i><\/b><\/h5>\n
In the current economic doldrums created by high supply-chain-induced inflation and rising rates, exposure to quality companies is warranted. The broader market is sharply down this year and may remain subdued next year if the Fed continues to hike rates and the economy tips into a recession.<\/i><\/b><\/h5>\n
Rising rates are negative for growth sectors like technology and biotech. The fund QQQS is highly-focused on these two sectors. Investors should note that only high-quality tech and biotech companies are likely to sail through in the current environment. Small-cap stocks appear even better bets as these are domestically-focused and do not get hurt by a rising greenback.\u201d\u00a0<\/i><\/b><\/h5>\n

These rationales are exactly what led me to feature these ETFs today.\u00a0 Ms. Saha\u2019s note expressed it so eloquently and concisely that I decided to include so much of it here.<\/span><\/p>\n

Consistent with its ValuEngine rating, four of the 10 largest stock holdings of <\/span>QQQS<\/b> are rated <\/span>5 <\/b>(Strong Buy) or <\/span>4 (<\/b>Buy).\u00a0 The <\/span>5<\/b>-rated stocks (strong buy) are American Semiconductor (<\/span>AMSC<\/b>), a Massachusetts based power-resiliency solution provider and Silk Road Medical, a medical device company headquartered in Sunnyvale, CA.\u00a0 The <\/span>4-<\/b>rated stocks represent Microvast Holdings (<\/span>MVST)<\/b>, a Texas-based battery technologies company and Amkor Tech, an Arizona-based semiconductor and packaging company.\u00a0\u00a0<\/span><\/p>\n

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

Given the fact that <\/span>QQQS <\/b>selects small-cap companies based on patent portfolios, I found its expense ratio of 0.20% (20 basis points) to be surprisingly modest.\u00a0 In contrast, the Invesco Small Cap Technology Index ETF (<\/span>PSCT<\/b>), also an Invesco product, has an expense ratio of 0.29% (reduced from 0.40% just last year) with no value-added research and less than half as many holdings, while just matching a cap weighted index of the technology companies in the S&P Small Cap 600 Index. The number of companies combined with cap-weighting makes quite a difference in diversification.\u00a0 The top 10 holdings of <\/span>PSCT<\/b> comprise 35% of its portfolio as compared with 9% for the analogous calculation applied to <\/span>QQQS<\/b>.<\/span><\/p>\n

While on the subject of fees, another Invesco ETF on a Nasdaq, the Invesco Nasdaq 100 ETF <\/span>QQQM (<\/b>QQQ has the word Trust in its title rather than ETF indicating a less-efficient legacy structure), is worthy of mention. Its advantages combine a structure that is more efficient because it can lend securities and reinvest dividends along with a fee of 0.15%. That is 25% lower than the 0.20% charged for <\/span>QQQ.\u00a0 <\/b>When you buy new shares of <\/span>QQQM<\/b>, you hold the exact same portfolio as <\/span>QQQ <\/b>but it’s cheaper and more efficient.\u00a0 My advice for those looking to add to or establish a new <\/span>QQQ <\/b>position to do so with <\/span>QQQM <\/b>unless you are trading more than 500,000 shares and need institutional liquidity. As is also true with the SPDR S&P 500 ETF (<\/span>SPLG<\/b>, 2 basis points) vs. the SPDR S&P 500 Trust (<\/span>SPY<\/b>, 9.5 basis points and less efficient). In the ETF world, you can actually pay more and get less.\u00a0\u00a0\u00a0<\/span><\/p>\n

______________________________________________________________<\/b><\/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
All of the over 5,000 stocks, 16 sector groups, over 250 industries, and 600 ETFs have been updated on<\/b> www.ValuEngine.com<\/b><\/a><\/h5>\n
Financial Advisory Services based on ValuEngine research available through<\/b> ValuEngine Capital Management, LLC<\/b><\/a><\/h5>\n
Free Two-Week Trial to all 5,000 plus equities covered by ValuEngine<\/b> HERE<\/b><\/a><\/h5>\n

Subscribers log in <\/b>HERE<\/b><\/a><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

The Nasdaq-100 Trust ETF, ticker symbol QQQ, is both one of the most loved and most hated ETFs in the US market. \u00a0 Investors who bought and held $10,000 worth 15 years ago on September 10, 2009 have every reason to love it.\u00a0 They now have seen that investment grow to $126,000, an annualized gain … 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":[469,31,407,2378,77,1617,2005,2006,2377,2379,2290,1726,193],"_links":{"self":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/3388"}],"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=3388"}],"version-history":[{"count":5,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/3388\/revisions"}],"predecessor-version":[{"id":3398,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/3388\/revisions\/3398"}],"wp:attachment":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/media?parent=3388"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/categories?post=3388"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/tags?post=3388"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}