QQQ Dominance Over DIA Flashes Warning Sign for Advisors

As clients look backward, their financial guides should look ahead.

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Reviewed by: etf.com Staff
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Edited by: James Rubin

The Invesco QQQ Trust (QQQ) and the SPDR Dow Jones Industrial Average Trust (DIA) have a long, interesting relationship. 

They are each considered important measures of the trend and health of the U.S. stock market. While the S&P 500 has become the primary reference point for most of the advisory business, the Dow is still “the market” to many who remember when it was considered the only meaningful benchmark. 

And with the ascendance of the Magnificent Seven stocks, and a bevy of technology giants before them, the Nasdaq 100 Index is also considered by many to strongly reflect the stock market. Heck, QQQ even has its own television commercial.

As time has evolved, a distinct pattern has shown itself repeatedly, but it doesn’t involve the S&P 500, except for the fact that the 30 stocks in the Dow and the ones which sit at the head of the table for the top-heavy Nasdaq 100 are also major players in the S&P 500 index. That pattern: QQQ and DIA performance diverges significantly, versus what typically occurred in years past. 

Those two ETFs are icons for the modern investment terms “risk on” and “risk off,” at least in relative terms. When markets feel juiced, QQQ trounces DIA, and when concern creeps in, DIA leads. It flip flops back and forth for days, weeks or months at a time. 

And with both ETFs now having traded for more than 25 years, there is plenty of data to analyze. So, that’s what I did. 

QQQ Versus DIA: Trends Emerge

I analyzed 290 six-month time frames, extending to 2000. Advisors may be familiar with the six-month concept, since Riskalyze, which became a leader in helping its industry assess client risk tolerance, cited studies that implied that clients can handle losses for about six months before they start to get antsy—or worse, start looking around for a different advisor.

In reviewing the performance of QQQ and DIA over those 290 periods of six months each, here’s what I found:

  • On 40 occasions, QQQ’s performance bested DIA’s by at least 10%, and 34 times, DIA outdistanced the return of QQQ by at least 10%. So, about one-quarter of the time, one or the other had a significant short-term victory.
  • Of those 74 periods where QQQ and DIA diverged that much, 25 of them have occurred since the start of 2020, or about four years ago, and four of the 25 years in the study. 
  • 32 of those instances took place between March 2000 (the first month of the study) and October, 2023, a period characterized by the bursting of the dot com bubble, and the start of a big recovery from that three-year bear market.
  • So, in a study that covered 25 years, 57 of those 74 six-month, 10% performance gaps between QQQ and DIA occurred in just 7½ of those years. Or to simplify it, 77% of those gaps covered only 30% of the period. 

What Does All This Mean?

Advisors should understand clearly that the post-pandemic period in the stock market is a highly unusual one. There are many reasons for that, but it manifests itself in what looks more like a haves-versus-have-nots market environment than at any time since the dot com bubble.

The other key implication from this geeky yet important data is that advisors and investors should be aware that this divergence in performance is more frequent now than at any time since the turn of the century. More proactive advisors might take this information as a starting point to separate their QQQ-style mega cap growth stock exposure from everything else, given that it behaves increasingly like its own asset class.

I also looked at one-year time frames over the same period. One note from that part of the study: QQQ is on a winning streak over DIA, in that it has outperformed by at least 10% in each of the last 12 one-year periods. There was a similar pattern that lasted until the dot com bubble changed it abruptly, sending DIA on a 27-period winning streak immediate after the bubble burst.

There’s no predicting the future here. Just some facts that remind advisors to not let clients get too comfortable in a unique, often confusing and certainly complex post-pandemic stock market climate. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.